The first half of 2011 has come to an end; it’s time for the half-time tune up. What lies ahead for the rest of the year?
Benchmark asked five investment experts for their views.
Peter Elston, Strategist, Aberdeen Asset Management Asia
Paul Fu, Associate Director of Funds Distribution Asia, AXA Investment Managers
Geoff Lewis, Head of Investment Services, J.P. Morgan Asset Management
Dr. Mark Mobius, Executive Chairman, Templeton Emerging Markets Group
Alistair Thompson, Director of Asia-Pacific Equities, First State Investments
What is your overall market outlook for the second half of 2011?
Evidence suggests that global growth is peaking. Our currency team’s proprietary leading indicators appear to have
topped out, while our proprietary global growth indicator has also turned lower, dragged down by the savage retreat in
activity in Japan. We stick with our view that economic activity could slow going into 2012, however we believe it is most
likely a mid-cycle pause rather than a renewed downturn. The outlook for monetary policy has become less clear, though
we suspect that the main area to watch will be Asia, rather than the US or even Europe. The Fed is expected to complete
its second round of quantitative easing (QE2) in June and is likely to keep interest-rate policy unchanged, while the ECB
could tighten further in Q3.
The big question is not whether economies are slowing – they clearly are – but whether it is similar to last
year’s lull or something more serious. Right now, we think the recent fall in commodity prices has taken some of
the pressure off consumer price inflation in emerging economies, and thus off central banks to tighten as much as
previously might have been necessary.
Emerging markets are now in a secular bull market and we expect this trend to continue into 2011, albeit with
corrections along the way. We believe that even more money will be directed into these markets as investors around
the world are beginning to realize that emerging markets are growing three times faster than developed markets,
have more foreign reserves and lower debt-to-GDP ratios. Moreover, the search for higher returns in a low-interest rate
environment coupled with attractive valuations in emerging markets could continue to support equity prices.
This will be reflected in the earnings of emerging market companies and, ofcourse, the prices of those companies.
There will be leads and lags in the movement of the markets but it is clear that over the longer term, emerging
markets will outperform developed countries.
What potential risks lie ahead?
The economic risks are well known and seemingly understood by market participants, ranging from concerns
over the Eurozone debt issue, Chinese tightening, the end of QE2 and the postquake supply disruptions in Japan, all of
which have been reflected in a greater concern about a global slowdown. The impact of the latter two risks will soon
become largely known; we do not see any material impact on the underlying global growth trend.
However, there is also a risk that any natural pause in economic activity in 2H 2011 could be exacerbated by
the combined effects of greater fiscal tightening in the UK and
Europe, while significant monetary tightening in
China and the emerging markets could bring visibly slower growth there.
We believe that surging inflation and rate hikes are the potential risks in Asian markets. In addition, the nonperforming
loan issue of the China banking system and potential asset bubble in Hong Kong and Singapore
markets are other areas that investors
should pay attention to.
I believe the risks are threefold: firstly, a blow to global risk appetite on financial markets due to the European sovereign
crisis; secondly, further commodity price inflation, particularly on oil; and lastly, over-tightening in China leading to a
hard landing, given the hidden risks in the banks’ balance sheets.
Are you taking a more passive or active strategy and why?
We are always active though this does not mean lots of activity (quite the opposite in fact). Successful investment
necessitates being different, though of course you also need to be right, at least more often than not. Furthermore, being
different takes guts, as one’s short-term performance will often be poor. But that should not be something to worry
about; it is simply the cost of good longterm performance. Once you look at the effect of compounding above-average
returns over many years, you realise it’s a pretty small cost. What are we doing in our Asian balanced funds right now?
The major variation is with respect to sovereigns, where we are very light.
In our Global Balanced portfolios, we remain nervously overweight in equities vs. bonds, but have calibrated
our asset allocation strategies so that we are running approximately 20% less ex-ante risk in portfolios than our
normal long-term average, reflectingreduced conviction about risk assets. The investment environment remains
unclear, but the case remains strong for staying significantly (rather than fully) invested, thanks to high risk premia,
compressed levels of volatility and normalizing correlation of stock/bond returns.
What kind of return and risk do you anticipate for the different asse classes?
Within bonds, we remain overweight in Emerging Markets and US High Yield bonds. Within equities, we are
overweight in US and Emerging Markets. We expect equities to provide higher returns than bonds, credit and cash in
general in 2H 2011.
Within equities, we favour consumer staples on the back of strong domestic consumption outlook supported by
demographic trends and growing middle-class. Consumer staples companies usually have more price
bargaining power and show sustainable and relatively predictable earnings growth. We also like telecom
companies, as they can generate stable cash flows and distribute a greater proportion of pro
to shareholders. Their dividend yields are attractive in current low interest rate environment.
In the technology sector, we can also find attractive opportunities in companies with technological edge,
high barriers to entry, very competitive low cost structures and ideally strong brands.
Currently we think that credit offers the best risk-reward characteristics. Earlier this year we took profits from an
overweight in equities. We think the current economic backdrop combined with monetary tightening is not the
very best time to be very brave. Despite this somewhat more prudent stance we
think that later in the year the settings should clear to take some more risk on board.
What are your favorite sectors and how do you capitalize on them?
We’re very positive on gold, and think that every portfolio should have some gold exposure. The gold price has done
very well over the past six or seven years but we think it has further to go. We maintain a large position in a gold
mining company as a hedge against further currency debasement and inflation.
We prefer cyclical sectors over defensives – to be more precise, we are positive on Energy, Materials and
Consumer Discretionary as these sectors have a PEG ratio of around 0.7 and positive earnings momentum.
What is that ONE investment you wouldn’t miss in the second half of 2011?
What is that ONE investment you wouldn’t miss in the second half of 2011?
I remember being asked in February last year what my must-have investment was. My answer was a self-help book on
how to remain calm in a storm, on the basis that one should remain invested in equities, but that it would feel very
uncomfortable doing so. I suspect the same still applies.
I would never say there is one investment you wouldn’t miss as everyone has a different level of risk
tolerance. For risk adverse investors, corporate bonds and high yield remains compelling in terms of its risk and
reward as credits remains in the sweet spot with strong balance sheets, while investors who have a high level of
risk tolerance may look at the Energy, Materials and Consumer Discretionary sectors as valuations remain compelling,
with positive earnings momentum.
The only investment that we wouldn’t miss at any time would be a well diversified portfolio of emerging market
stocks. What sectors and markets are you most bearish on?
The risk-reward ratio for G7 government bonds looks unfavorable to us on a medium term horizon, though we
see bonds remaining well supported during the present weak patch in global activity. US Treasuries and TIPs
look particularly rich right now. We are thus underweight developed market government bonds in our global
We struggle for investment ideas in China, where, although there are some high-quality companies, valuations are
too rich for our liking. This is especially true in the consumer sector. We are also a bit concerned about the banking
sector as we think banks will be more heavily regulated and structurally less profitable in the long term.
No one can predict the market direction and a bear market could start at any time. The good news is that bear
markets are shorter in duration than bull markets; and bear markets falls are a smaller percentage than bull market
increases. Global economic conditions are positive, countries have made substantial strides in reforming their
economies, and many Asian markets have strengthened their fiscal positions and built foreign reserves. In addition,
commodity prices remain high and liquidity is abundant.
Can you provide one last word of advice for Benchmark readers?
Paul Fu: n>
Market efficiency is subjective not objective, meaning that it depends on who you are. For most, markets are and
always will be 100% efficient. But if you have an edge, some sort of knowledge or skill that others do not have, then
there will be inefficiencies to be exploited. So, first, you should identify your edge, and then have the guts to
put it to good use.
To serve as a guide to investors for the coming six to 12 months, we would offer the following global economic
scenarios:- A base case as follows, with perhaps a 65% subjective probability: subpar global economic recovery continues
into 2012. With US GDP growth at trend or around 2.5% and inflation also hovering around 2.5%, nominal income
growth would be close to 5%, evenly split between real expansion and prices. Under this central macro scenario,
G4 central banks would remain accommodative throughout 2011. Sovereign yields would most likely remain in a trading range, though with
trading range, though with a tendency towards positive drift rather than remain stationary over time.
To the more extreme barbell scenarios of either: closing the output gap (world GDP growth faster than 4%, inflation
above 3% and accelerating), or a double dip scenario (world GDP growth negative and inflation falling towards
zero), we would attach a probability no higher than 10% to each. For the remaining 15% probability, we
would pencil in a temporary bout of mild stagflation for the global economy. Here we might expect to see world GDP
growth at 1% to 1.5% combined with inflation of 3% to 4%, divergent centralbank policies, and weak government
In terms of investment strategy, investors should cautiously positioned to mitigate the downside risk by buying
good quality companies, this is a key strategy no matter whether investors are optimistic or pessimistic. If you
buy good quality companies, and do thorough research, you can protect yourself when risk aversion returns.
Take a long-term view even if you desire short-term rewards. If you take a longterm view of the world and the markets,
you are likely to (a) be less emotional and thus less likely to make costly mistakes, (b) see beyond the short-term
volatility of the market, and (c) take a step back to see broader patterns of the market: political and economic behavior
that may not be evident to a short-term observer. In addition, I’ve always told investors that the best time to invest is when you
have the cash, and today would be no different. However, it is important not to jump head first into equity markets, or
for that matter, into any market. Also, you should separate the money you need for your daily life from the
money you are willing to put away for a few years (preferable five years). If you do invest in equities, it is important that
you invest your money in a diversified global portfolio and not just your home market. In this way, the volatility of your
holdings is likely to be less and you will gain exposure to markets all over the world. Dollar cost-averaging is also
important: put aside a fixed amount to invest every month and invest that amount regardless of the market level.
Invest in a mutual fund operated by a trusted institution with a good solid reputation and a track record.