Is Asia in an euphoric phase?
At the IMAS conference, Julius Baer's CIO presented a markedly bearish view of markets, with some private banks agreeing so too. By Genevieve Cua
ASIAN and global markets are currently in an 'euphoric' phase of 'over-trading' which suggests that investors who buy into markets now may well rue their decision over the next few months.
Stock indexes of Asian markets at the HKSE on March 11. Other evidence of euphoria include real estate prices in Asia and record issuance of equity and bonds
V Anantha-Nageswaran, chief investment officer of Bank Julius Baer & Co, presented a markedly bearish view of markets to an audience of fund managers earlier this week. He was a panellist at the Investment Management Association of Singapore's annual conference on Thursday.
His views appear to be echoed to some extent by some private banks. Citi Private Bank, for instance, has issued a report that risk aversion in Asia is likely to stay pronounced in the summer months. Clariden Leu's chief investment officer Sandeep Malhotra, is advising clients to stay cautious.
But Russell, in its first survey of 40 Asian fund managers at end-March, found them 'overwhelmingly bullish' on the prospects for Asian equities, despite inflation risks and stronger local currencies.
In his talk, Dr Van set the premise that the issues that have been central to the 2008 crisis - the mispricing of risk and capital - continue unabated and will cause markets to come undone. 'Structural issues are dominant; valuation considerations are given the go-by; real interest rates are negative; and we see a mispricing of risk. (The world) continues to stick to a hydrocarbon model (of energy generation), so inflation and currency debasement are two inevitable consequences.
'No wonder gold is at US$1500 (per ounce), and will continue to rise as long as central bankers talk inflation but do not walk the talk with interest rate rises.' Gold traded yesterday at US$1508.
Dr Van argues that based on inflation-adjusted price earnings multiples, the current PE of the S&P 500 is just below the 1929-1930 and 1999-2000 peaks. Based on the Kindleberger/Minsky cycle of financial markets (refer to graphic) - which posits seven stages - Asian markets are currently in the fourth or euphoric phase. This is likely to be followed by insider profit taking, panic and revulsion, he says. 'Hopefully that sets the stage for a real and more enduring bull market.'
Other evidence of euphoria include real estate prices in Asia and record issuance of equity and bonds.
On the sidelines of the conference, he said: 'We're telling people to buy commodities . . . As for other risk assets, it's very difficult to find value. If you are wading into risky assets, you're buying close to the peak of the cycle. To be honest, there isn't much value in most parts of world. It's a delusion to believe there is value in Asia.'
Clariden's Mr Malhotra notes in a letter that equity performance in the first four months has been 'remarkable', as both S&P and DAX were up 8 per cent in local currency terms. This is equivalent to 24 per cent on an annualised basis. ' . . . the fact is that risks for 2012 have gone up and the probability of tail risk events occurring in 2011 continues to rise.' Oil prices and inflation are high on his risk list.
He tells clients to 'diversify, protect against inflation and focus on absolute return'.
Clients, he says, can choose to continue to ride the wave of liquidity in the hope that the risks will resolve themselves. 'Or, one can recognise the risks as emanating from unresolved fundamental issues and invest to generate an absolute positive return, especially after having already reaped solid gains in markets in the last two years.
'We have chosen the latter path since the beginning of 2011 - in order to preserve capital, protect against inflation and rising rates, and generate returns by taking a lower amount of overall risk, even if it entails giving up some upside.'
John Woods, chief investment strategist (Asia Pacific) of Citi Private Bank, expects equity markets to struggle in the coming months. Asia, he wrote in a May report, will not be able to escape the fallout from problems elsewhere. These include slower growth in the US; Eurozone issues; and even Asian seasonal return patterns.
On the latter point, historical patterns suggest that the bulk of the year's returns are generated between November and April. Investing in the MSCI Asia ex Japan in November-April results in an average gain of 9.4 per cent, with positive results likely 71 per cent of the time. Investing between May and October results in average gains of just 1.5 per cent, with positive returns 57 per cent of the time.
'Obviously every year is different, has its own characteristics and anything can happen. But investment cycles - for whatever reason - can also contain useful information which investors ignore at their own risk. In our case, it adds another layer of reasons to maintain our risk-averse bias.'
Meanwhile, a survey of fund managers by Russell at end-March - amid rising oil prices, Mid-East turmoil and Japan's disasters - found a growth bias among 40 fund managers. Managers were most bullish on China, followed by Korea. Inflation topped the list of risks.
On valuations, 43 per cent felt that Asian markets were fairly valued, with 30 per cent saying that they were undervalued. 'This perspective is shared by Russell, as we generally view the equity market valuation as neutral for Asia ex Japan. We also agree that equity markets have upside, but we're wary of some of the more bullish forecasts,' said Sarah Lien, Russell Investments senior research analyst. Future market corrections were seen as buying opportunities.
Albert Lam, IPP Financial Advisers investment director, believes that there is still room for markets to run, based on the firm's models which show that based on a number of metrics such as PE and price to book multiples, Asian markets range between attractive and reasonable. He expects emerging markets and Asia to underperform developed markets such as the US, however.
'This is not the time to be cautious. There is still a lot of money to be made. Rates will continue to be low for some time. Even if rates rise, they are normalising, and that is a good word.'
gen@sph.com.sg
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