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Not too late to board investment train
JUST half a year ago, global financial markets were going nowhere, fretting over the prospect of businessman Donald Trump becoming US president.
By the end of the first quarter in 2017, markets have surged significantly, riding on a wave of economic optimism across the developed and emerging world.
Is it too late to jump in? Not so, say analysts. Improved economic fundamentals will lead to higher profits at companies, they say.
Geopolitics over Syria and North Korea may cause volatility, they caution. Yet valuations across Europe and Asia are not expensive. In the US, high profitability and potential fiscal stimulus may make high valuations justified, they say.
"The fundamentals are fine," said Kevin Gardiner, global investment strategist at Rothschild Wealth Management. "We like continental Europe and emerging Asia. We expect most stock markets to be better than most bond markets. Even in the US ... we still think it'll do OK."
Valuations in the US, the biggest financial market in the world, are not at "crazy" levels yet, he added.
"When we find people rationalising a forward multiple of 20 times on the S&P 500 rather than 18 times, then it'll be time for a rethink. But it doesn't feel that we'll be going there in a straight line anytime soon."
In the current quarter, markets could be cautious due to geopolitical risks, according to IG market strategist Pan Jingyi. "Significant upside may still depend on the new administration's plans to effect changes in the economy," she said.
Mark Schofield, managing director of Citi's global strategy and macro group, said in a report last week that the team anticipates gains of 5 per cent for global equities for the rest of the year.
The positive outlook is driven by a "reasonably optimistic economic forecast and a solid improvement in earnings in 2017", he said.
Mr Schofield said valuations look stretched, with global equities trading at 21 times trailing earnings, well above the long-term median of 17 times. There are also tensions in the Middle East and uncertainty around European elections.
But these concerns are mitigated by a positive economic outlook and low bond yields, which make stocks more attractive.
"Increased volatility and downwards corrections are likely. However we do not anticipate a major downturn in equity markets," he said.
Just three out of 18 of Citi's bear market scorecard indicators are flashing red, compared to 17 out of 18 before the 2000 correction and 13 out of 18 in 2007, he said.
At UBS Asset Management, Geoffrey Wong, head of global emerging markets (EM) and Asia Pacific equities, quoted a song by US pop duo The Carpenters by saying: "We've only just begun".
After five to seven years of a downturn, emerging markets might be at the beginning of a long economic cycle lasting another four to six years, he said. Mr Wong said EM equity valuations are considered cheap relative to the US, and asset classes like bonds where yields are still low.
Opportunities abound across Brazil, Russia, and around Asia, he said. The house likes Korea and Taiwan tech stocks, for example.
As China transitions to become an economy oriented towards services, there are many investment opportunities across insurance, education and e-commerce, he said.
Allianz Global Investors global strategist Neil Dwane said that with solid growth globally, there are value opportunities present in the growth of Asia and the lower valuations of Europe.
In Asia, a sharp rebound in exports in the first three months of the year have led to houses like Deutsche Bank upgrading their growth forecasts. While the US is reviewing its trade policies, the outcome is not necessarily bad for global trade, the bank said.
"In fact, we think that if it focuses on ensuring adherence to international norms, rules and agreements, its efforts would then be positive."
Tuan Huynh, Deutsche Bank Wealth Management's Asia-Pacific chief investment officer, said the first week of April revealed March data that is positive for both equities and credit in Asia in the second quarter.
Asia purchasing managers indices (PMIs) are, on average, the highest they have been in two years.
China manufacturing and non-manufacturing PMIs climbed further from February levels, and Japanese economic growth is expected to be boosted by Olympics-related infrastructure spending this year, he said. Tokyo hosts the 2020 Olympics.
South Korea's March exports to South-east Asia, Japan and China did particularly well, highlighting the improvement in Asian demand, he said.
A synchronised improvement in economic data across the world will catalyse the business cycle in the upcoming quarters, said Guilhem Savry, investment manager of cross asset solutions at asset manager Unigestion.
However, prices reflect a lot of the good news and investors should be selective and focus on valuation, he said.
"We are therefore cautiously optimistic for the short term because sentiment and valuation could offset support coming from fundamentals. And we are still very positive for the medium term."
Asset class picks
Across asset classes, Mr Savry likes growth-related assets like EM equities, inflation-linked bonds and commodities, and somewhat cautious on government bonds especially European sovereign bonds.
"We have increased our Japanese yen exposure versus the Korean won as a hedge against temporary market corrections," he said.
John Stopford, head of multi-asset income at Investec Asset Management, said that high-yield corporate bonds are getting pricey.
But most developed market assets are "modestly expensive" and EM assets are "fairly valued or cheap, especially stocks".
Desmond Soon, Asia ex-Japan head of investment management at bond manager Western Asset Management, said ageing populations in Asia and growing wealth will underpin a demand for fixed income, despite concerns over higher inflation.
"We manage our Asia bond strategies with an attractive running yield without sacrificing credit quality," he said.
"To achieve this, we have allocations to higher yielding India and Indonesia sovereign, quasi-sovereign bonds and US dollar denominated Asia high quality corporate bonds. Asia local bonds and US dollar denominated Asia corporate bonds still offer a considerable pickup over developed market equivalents."