Monday, July 19, 2010

Go Asia For Consumption Stocks

WITH equity markets continuing to be volatile for the foreseeable future, wary investors will be looking for pointers on where to put their money.
The global economy is still confronted by a bleak US jobs market outlook and further troubles brewing in the eurozone which may affect wider Europe.
There is also growing realisation that earnings upgrades have run beyond underlying economic fundamentals and business conditions, prompting investors to pull back.
As reported earlier in StarBiz, investors may look towards the US markets for some sort of lead as Wall Street kicks off the second quarter’s earnings report.
However, future corporate earnings growth, and therefore of the economy, may not be rosy as stimulus measures taken to boost growth at the height of the financial crisis wane, or are withdrawn, and consumers in the developed world continue to tighten their belt.
A report by ECM Libra Investment Bank Bhd research head Bernard Ching dated July 14 shows three underlying themes for investing in the third quarter in the local equity market.
He recommends a switch to high-dividend yield defensive stocks for capital preservation, buying undervalued cyclical stocks with exposure to domestic demand and consumption recovery in Asian economies and riding on the strengthening ringgit.
“We favour a defensive strategy over the next three months until there is better clarity in the fourth quarter,” he says.
Ching suggests accumulating undervalued stocks predominantly driven by consumption growth domestically and in Asia in view of external uncertainty and concerns over domestic policy.
“While exports to advanced economies may come under pressure due to tepid consumption growth, we believe Asia will take the lead in global consumption growth,” he says.
He adds that investors should ride on to the strengthening ringgit as structural issues such as high unemployment and fiscal deficit in the US, eurozone and Britain will make their currencies less attractive.
Fund managers are also picking up on the domestic consumption story in Asia with Fortress Capital Asset Management Sdn Bhd chief executive officer Thomas Yong preferring China, Hong Kong and Singapore due to their still strong growth prospects.
“We like the domestic consumption stories in all these markets and therefore prefer the consumer products and retailing sectors there,” he says.
Yong adds that the consumer theme includes the automobile sector. “As an extension, the China and Hong Kong markets also offer numerous proxies to US recovery in consumption spending – particularly sporting goods manufacturers,” he says.
Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose says the stronger balance sheets of the public and private sectors in the Asean markets make them attractive.
He recommends exposure to plays on Asean domestic economic activity such as the banking, retail, property development and insurance sectors.
“As the developed world keeps real interest rates below zero and prints money, that liquidity will find the best returns in Asean,” Ambrose adds.
He points out that Asean’s banking sectoris “relatively unpolluted by worthless proprietary trading books, their fiscal balances are sounder (Malaysia’s deficit is high, but almost entirely funded domestically) and the man in the street has savings as opposed to his developed world counterpart’s debt.”
Ambrose says the surest bet is the gradual strengthening of Asian, and especially Asean currencies, against the greenback, euro, sterling and yen.
He believes gold should be an important part of any investment portfolio as insurance against the folly of mainly developed countries’ central banks.
While Ambrose feels that inflation is under control and not an immediate threat, “if you keep printing money, inflation will occur”.
Both Ambrose and Yong are wary of commodities with the former saying that commodity price movements are greatly influenced by the economic health of China, the biggest swing contributor to demand growth.
“Any slowdown could lead to commodity price weakness,” Ambrose adds.
Yong says Fortress Capital typically shies away from investing in exotics such as commodities but remains bullish on oil prices over the long term.
On bonds, he says the favoured segment of the market “is probably shorter duration higher credit rating issues”.

1 comment:

kristy said...

Very informative post. Thanks for taking the time to share your view with us. Great article, you mention some really interesting point.