Where to put your money next year
The world economy has got off the deathbed but its recovery in the year ahead will be sluggish. Gabriel Chen gets tips from financial experts for 2010 and finds out where the traps might be.
Dr Mark Mobius, executive chairman of Templeton Asset Management:
‘We believe commodities will continue to do well, and that includes gold. Commodity stocks look good because we expect the global demand for commodities to continue its long-term growth. To keep pace with domestic consumption, commodity prices will remain positive and though they will fluctuate from time to time, the overall trend globally is upwards.’
Mr Pierre Baer, SG Private Banking’s chief executive for Singapore and South Asia:
‘Among sectors, we prefer telecommunications and health care, which appear undervalued. The energy sector is expected to benefit from the recovery and a steady rise in energy prices. Emerging markets are also favoured with a preference for Latin America and Asia with notably India, Taiwan and South Korea at the forefront.’
Mr Thomas Kaegi, head of macroeconomic research, Asia Pacific at UBS Wealth Management:
‘We advise clients to stay away from developed-market government bonds. Low interest rates make them an unattractive yield play and the removal of monetary policy support and rising inflation fears may hurt the sentiment towards governments.’
Mr Wyson Lim, OCBC Bank’s head of wealth management in Singapore:
‘Within the equities space, we remain most positive on the Asia ex-Japan region, which is expected to enjoy superior economic and earnings growth compared to developed markets. While bourses in the region have run up significantly in recent months and are fairly valued based on this year’s earnings, they are still attractively valued if investors are prepared to look out over the next two to three years.’
You could term 2009 the year the world did not end.
Flash back 12 months and it looked like a financial Armageddon was about to descend on us all.
Most experts were of like mind: Financial markets would continue to bleed, banks would keep failing, millions of jobs would be lost, profits would evaporate. Think of the worst-case scenario and double it and you have an idea of the mood back then.
‘Till March, negative sentiment was at the fore with concerns that capitalism was at an end,’ recalled Mr Daryl Liew, chief investment strategist of independent wealth management firm Providend.
But the world did not end; 2009 surprised us all.
Financial markets have been on a roll since March as investors’ risk appetite returned amid signs of recovery in the banking sector and global economies.
The MSCI index of stocks in the Asia-Pacific region outside Japan is up more than 60 per cent from a five-year low on March 9.
Dubai’s debt crisis, which unfolded last month and rattled global financial markets, turned out to be a blip on the radar screen.
Most markets have stopped panicking and have recouped their losses.
After a head-spinning year like this, it is no wonder many in
the prediction industry are scratching their heads when it comes to 2010.
Some finance practitioners caution that a big risk to the improving economic climate is the emergence of asset bubbles, fuelled by investors borrowing cheaply in US dollars to stock up on emerging market equities and commodities.
This risky strategy of using the weakening greenback to finance bets in higher-yielding assets
is known as the US dollar carry trade.
It can turn nasty fast. If the US dollar rises in value relative to the currency the investor is using to fund the purchase, then huge losses can result.
‘Everybody’s playing the same game and this game is becoming dangerous,’ warned New York University professor Nouriel Roubini, one of those who accurately predicted the magnitude of the global financial crisis.
‘This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.’
Not everyone agrees with his assessment – further proof that even experts do not always see eye to eye.
‘What bubble? It’s clear Mr Roubini hasn’t done his homework, yet again,’ veteran investor Jim Rogers told Bloomberg.
Bubble territory or not, experts say that investors should be mindful of risks and be prepared for volatility next year.
‘With talk of higher interest rates, the easy gains behind us, and greater reliance on earnings going forward, it is likely that markets will see greater swings over the next year than has been the case since March,’ said Dr Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.
Mr Wyson Lim, OCBC Bank’s head of wealth management, advised those looking to invest to buy gradually over the coming months to ride out the uncertainty and volatility in markets.
Hot themes next year:
They are the next emerging markets and include Kazakhstan, Romania, Nigeria and Sri Lanka. They are generally more undervalued than the emerging markets of Brazil, Russia, India and China, a grouping known as Bric.
‘I do not believe the level of risk is necessarily higher as compared with emerging markets,’ said Dr Mark Mobius, executive chairman of Templeton Asset Management.
‘Frontier markets generally share the same political and economic issues as emerging markets, but their valuations may be more attractive as a result of this perception.’
The Templeton Frontier Markets Fund is one way retail investors can access such investments.
The fund’s top holdings include Ecobank Transnational, a pan-African banking group with a presence in many African countries, and MTN Group, a South African- based mobile telecommunications company.
For a start, exchange rate movements are notoriously difficult to forecast over the near term and even professional foreign exchange traders get their bets wrong.
Still, many in the business believe that the Australian dollar, Canadian dollar and Norwegian krone – all of which have appreciated this year – will continue to do well next year on the back of stronger commodity prices and likely interest rate hikes.
These currencies belong to countries where commodities form a substantial portion of their exports.
Mr Manpreet Gill, Asia strategist at Barclays Wealth, expects the trio’s interest rates to rise faster and higher relative to others.
‘Norway and Australia were never hit hard by unemployment, and Canada is already adding jobs. Most macroeconomic indicators in these countries are looking more positive, and together argue for tighter monetary policy,’ he said.
Central banks can ‘make money tight’ by raising interest rates, which increases the cost of borrowing and effectively reduces its attractiveness.
A rise in a country’s interest rates relative to those in other countries will tend to lead to an appreciation of its exchange rate against other currencies.
Investors can get foreign exchange exposure through various means. Buying shares of ANZ Banking Group, for instance, gets you Australian dollar exposure.
Then there are foreign currency time deposits, which offer interest on your deposit, as well as capital gains if exchange rates move in your favour.
He explained that Indonesia exports commodities to China and India so it should benefit from their robust growth.
‘Not only are Indonesian equities set to benefit but also other Indonesian assets like corporate and sovereign bonds, money market, currency, in general,’ said Mr Kaegi.
Then there is the Chinese yuan appreciation theme.
Mr Kaegi expects the People’s Bank of China to allow the yuan to rise against the US dollar next year.
This should fuel demand for Chinese yuan-denominated assets or instruments benefiting from the expectation of Chinese yuan appreciation.
One of the more straightforward ways to ride on this theme is to invest in Chinese-yuan denominated stocks on the Shanghai and Shenzhen stock exchanges, but this mode is not available to everyone.
Access to the so-called ‘A-shares’ market in China is limited to Chinese nationals and Qualified Foreign Institutional Investors approved by the Chinese regulator.
Mr Kaegi recommended that keen investors explore Chinese yuan assets listed outside China, including Hong Kong’s China Enterprises Index, Chinese equity funds and Chinese stocks listed overseas.
Cyclical sectors such as financials, technology and property rallied ahead of defensive sectors like utilities, telecommunications and health care.
Experts tip the defensive sector – so-called because it comprises companies whose business performance and sales are not highly correlated with the larger economic cycle – to do much better next year.
‘In a nutshell, we recommend taking profits on cyclical equities and reinvesting proceeds on defensive stocks,’ said SG Private Banking’s chief executive for Singapore and South Asia, Mr Pierre Baer.
Ms Mah Ching Cheng, manager for research and analysis at First State Investments (Singapore), favours telecommunications companies due to their ‘defensive earnings, strong cash flows, stable dividends paid and attractive valuations’.
‘Telecoms companies in India and the Philippines look attractive for us at this juncture,’ she said.
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