Friday, July 27, 2012

Plenty of opportunities for investors amid turbulence

Business Times: Thu, Jul 26

I ONCE read a quote which I felt was good advice - not just for life in general but also in relation to investing in financial markets. "Life - or markets in this case - may not always be the party we hope for, but while we're here we might as well dance."

This is true especially today, and despite the variable market performance in the first half of 2012, investment opportunities continue to emerge in turbulent times. Clients who have stayed the course on their long-term investment objectives and capitalised on the market volatility would undoubtedly have navigated better in terms of portfolio performance.

In view of the continued heightened global economic uncertainty, the key investment focus remains defensive with a continued search for yield. Since the start of the year, fixed income has turned out to be the asset class of choice. Within the asset class, the outperforming segments have been high-yield bonds, emerging market debt and bank perpetuals - of particular note were Indonesian bonds which benefited from the country's investment rating upgrade. Private bank clients have also directly participated via fixed income funds. In the new issues market, we have also witnessed reasonable continued demand for Chinese property developer bonds, Indian bank debt and Singapore dollar-/offshore renminbi-denominated new issues.

On the equity front, investors continue to favour companies with moderately geared balance sheets and solid cash flows that promise strong dividend yields. Specific focus has been on global blue-chip names, with exposure to sectors and geographies with strong relative growth prospects, especially those trading at historically attractive valuations.

From the perspective of investors' risk profile, highly conservative investors continue to prefer investment grade senior bonds which remain an attractive alternative despite the low nominal yield level within the fixed income space. Conservative investors continue to take equity exposure through structured products offering capital protection although their preference is also for short tenors which has had a limiting effect on overall potential returns.

Investors with a higher risk tolerance have sought enhanced returns through the selective use of leverage applied to investments providing a high relative yield, with many also comfortable adding a foreign currency overlay to further enhance returns. The uncertainty prevailing in the equity markets have meant that sophisticated investors, who are comfortable investing across all asset classes, have successfully focused more on foreign currency trading, precious metals and other commodities, such as oil, for opportunistic returns.

What lies ahead?

Capital markets are likely to remain volatile with potential downside in the next three to six

months. Market pressure from the current European crisis is set to continue, given that a permanent resolution, one that requires greater European fiscal and financial integration, is unlikely to emerge any time soon.

In the United States, while the private and corporate sectors remain in good shape, market volatility may rise in the second half of the year as we approach November's presidential elections. In Asia, while policy makers do have necessary tools and wiggle room to provide the necessary stimuli to avert any sustainable and sharp slowdown, it may not be completely shielded from the woes of the Western world.

Therefore, as the current of uncertainty is unlikely to subside, investors will continue to seek less risky assets with high relative yields while cash returns remain low. Defensive instruments such as high dividend-yielding stocks, corporate bonds or developed government bonds will continue to be popular with investors.

What's in store?

In the second half of 2012, the Asian primary bond issuance market will remain buoyant as corporate issuers take advantage of the current low interest rates; potential issuance would come from Indonesian quasi-sovereigns, Chinese state-owned enterprises and the Indian banks.

While the new issuance market remains attractive, valuation of both investment-grade and high-yield credits in secondary Asian fixed income appear fairly priced vis-à-vis their US counterparts in terms of credit spread, therefore limiting the scope for further outperformance.

In the private debt markets, we believe there may be interesting opportunities for investors to deploy capital to distressed assets in Europe that are of value as distressed sellers emerge. To gain effective access to these, investors will need to consider close-ended fund offerings from specialist asset managers which will be coming to market.

What's our stance?

On tactical asset allocation, we maintain that clients should own a fully diversified portfolio across different asset classes. As investors climb the current wall of uncertainty, the outperformance of less-risky assets may continue for some time still. Thus, while it is imprudent to institute big bets across the different asset classes, the present volatile markets may present good opportunities to facilitate timely portfolio adjustments, at the margin, from time to time.

On a strategic basis, we see value in global equity markets, albeit the current challenging outlook for economic and corporate growth. Investors with a longer investment time horizon and who can tolerate any short-term volatility will not be short of choices. Equities are trading at fairly attractive levels relative to history and to government bonds. In terms of an overall strategic asset allocation, our preferences are stocks, corporate bonds, developed market government bonds and cash, in declining order of attractiveness.

For now, we continue to advise our clients to be cautious when selecting any fixed income investments - we continue to prefer investment-grade issues or senior bonds. For emerging market bonds, we recommend issues from quasi-governmental entities and higher quality investment-grade Chinese real-estate companies, and advise that investors be selective on any Indian issues, preferably looking only at those from higher-grade issuers.

For perpetuals, clients may want to look at high coupons bonds with potential high step-ups. There will also be opportunities in the primary bond market to diversify one's portfolio, especially new issues in certain sectors that also offer valuation discount.

In Asia, we have a higher conviction on the economies of China and Indonesia. We believe these economies are likely to be the main beneficiaries of the medium-term trends of increased consumption and infrastructure growth. Overall, we believe that the Asian growth story remains intact despite what the markets would like you to believe. As they tend to be leveraged plays on the global economy, once the dust of global growth uncertainty settles, these markets may resume their long-term market outperformance.

The markets will remain volatile in the coming months with movements likely to be driven in the short -term more by news headlines than fundamentals. This will give rise to many investment opportunities and investors might do well to remember the words of renowned Chinese military general and strategist Sun Tzu. In his influential book The Art of War, he shares how the general who wins a battle makes many calculations in his temple before the battle is fought, while the general who loses a battle makes but few calculations beforehand.

This same wisdom applies to all investors who will succeed through disciplined planning and by staying focused on high-quality names during this time of volatility.

The writer is head of Global Research and Investments, Asia, Barclays

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C
Senior Sales Director
DTZ Debenham Tie Leung (SEA) Pte Ltd (L3006301G)

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