After the stellar performance last year, there is little wonder that our recent seminar titled “Will stock markets continue to head higher in 2010?” saw a large turnout as experts addressed investors' concerns and queries about the year ahead.
Eager to know what the year ahead holds for markets, investors posed questions that ranged from whether markets will see a significant correction to which sectors presented the most alluring investment opportunities.
Helping to answer their queries were fund managers from Schroder Investment Management and Lion Global Investors.
Here are the highlights of what the fund managers said.
Schroder Investment Management
Heading into 2010, we believe the recovery from the Great Recession is slowly taking shape. However, posing a challenge to a V-shaped recovery is the growing mountains of debt as well as rising unemployment in the developed countries.
Nevertheless, Asia's cyclical recovery looks a lot more promising, given its stronger underlying fundamentals. Emerging markets never took on debt the way developed economies did, so Asian households are much better placed to take advantage of easy credit. In addition, unemployment rates in Asia are also not as high as those in the West, which means that consumers have a higher propensity to spend given their greater confidence in job security. Furthermore, domestic demand has received a further cyclical boost from the huge monetary and fiscal stimulus in these countries.
Indeed, global growth is rebalancing with the emerging markets looking set to play a larger role going forward with emerging economies projected to account for more than half of global growth this year.
What does this economic backdrop imply for markets? In terms of equities we think the best prospects still lie in the less economically challenged emerging markets, which are also benefitting from the strength of activity in China as well as strong liquidity conditions. As for bonds, we believe that credits still offer attractive running yields, especially given the low cash rates currently.
Within alternatives, we are most positive on commodities, given the large amount of government stimulus directed through infrastructure and continued incremental demand out of emerging markets. Gold also remains a substitute currency as the majors indulge in competitive devaluation. As for currencies, we continue to favour emerging markets currencies, where economies are based on sounder structural fundamentals including balanced external positions and ample saving.
Overall, we believe investors should invest in liquid and diversified assets and be willing to be dynamic in their allocation. We are currently living in a rebalancing world, where significant changes that will impact asset prices are occurring. As markets rebalance to accommodate all these changes, asset price behaviour will be volatile. It may be wise for investors to look at Multi-Asset portfolios which seek to achieve the right mix of assets to perform through all market environments.
Lion Global Investors
We are most positive on equity markets in the Asia-Pacific ex-Japan region, mainly because of its strong macro fundamentals. China and India, as the two key pillars of global growth, will benefit the Asia-Pacific ex-Japan region more than the other regions. Among other things, this region has been amassing wealth over the past years which would enable them to acquire assets from other countries and participate in more merger and acquisition activities.
However, as a cautionary note, it should be borne in mind that market valuations, while not excessive, are getting less compelling. However, to a certain extent, this could be mitigated by a stronger earnings momentum, on the back of better cost structures and improving demand, which are supportive of equities. Within the region, we do expect to see differentiation in earnings amongst the sectors and companies with a key determinant being whether companies have greater exposure to Asian demand or Western consumers.
Within the commodity space, we continue to be positive on Gold. Given the burgeoning fiscal deficits and large debt burdens in developed countries, in particular the United States, we expect central banks and other investors to step up their purchase of Gold and other hard assets as they gradually diversify their currency exposure away from paper currencies. Additionally, Gold could continue to serve as a hedge against inflation in the longer term.
We are also positive on both Platinum given the strong demand outlook, supported by industrial production and consumer demand. With respect to bulk commodities such as iron ore and coking coal, the price outlook remains firm due to the concentration in supply.
For the year ahead, here are the key risk factors worth bearing in mind: · Possible sharp increases in bond yields · Monetary tightening by central banks · High unemployment levels which may lead to protectionism or socio-political tensions · The risk of asset bubbles in Asia · Potentially destabilising currency fluctuations
Given the potential for significant headwinds, investors should maintain a well-diversified portfolio to reduce risks. Investors should also brace themselves for short term volatility. Over the long-term however, the Asia ex Japan region continues to hold much promise.
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