2015 good year for returns: Fullerton

THE year 2015 is shaping up to be a "good" year for returns, said Fullerton Fund Management chief executive Manraj Sekhon. But volatility is likely to persist, thanks to a perceived "lack of clarity" among central banks on the economic outlook.

"(2015) is a good time to make good returns for clients. . . We're paying attention to building what we refer to as 'ballast' to make sure portfolios are structured to manage volatility," he said.

That this is the year of more central bank action is clear. "But the implications of that are not fully understood or appreciated. It's a constant theme affecting us. The most notable aspect is that it's a reflection of how uncertain the environment is in terms of growth and the inflation or deflation dynamic," he said. Fullerton on Tuesday hosted a luncheon to present its outlook for 2015.

While the US Federal Reserve is widely expected to begin to raise rates this year, some Asian central banks have taken on an easing stance in their monetary policies. On Tuesday, the Reserve Bank of Australia cut the interest rate to a record low of 2.25 per cent. Two weeks ago, the European Central Bank announced its bond-buying programme to boost the European economy.

Gerard Teo, Fullerton's head of strategy and currency, expects the Fed to "have the leeway to raise interest rates gradually over the next two to three years". Asia's backdrop of a "moderate" recovery suggests that India and China may also maintain easy monetary policies.

"There is room for equities to rise given that central banks globally are vigilant on downside risks. They continue to ease and cut rates," he said.

In terms of Asia ex-Japan equity, Andrew Maule, the firm's head of research, expects the region to deliver returns of around 10 per cent this year, including dividends. Apart from accommodative central banks, he expects corporates to benefit from lower input costs on items such as oil and commodities.

"One of the reasons why Asian stocks have not performed is that we've seen consistent earnings downgrades over the past couple of years," he said.

There continue to be more downtrades than upgrades in earnings expectations, but lower input costs are expected to boost margins. Oil price has halved from the 2014 highs; agricultural and industrial metal prices have fallen by 25 and 15 per cent respectively.

One of the issues dogging earnings is poor capital discipline, he said. "Companies in Asia over-invested in capital stock in contrast with the US. They expanded capex even though there has been no increase in revenues." Capex growth, however, has decelerated over the past year.

In terms of valuations, price/earnings multiples look "fair", hovering at around the 10-year mean, which suggests they are neither cheap nor expensive. "To get the multiples up requires higher return on equity, which has to come from better capex discipline and falling inflation."

In the current market conditions where stock-to-stock correlations have been falling, stock-picking skills become a more important driver for returns, he said. The themes he is positive on include consumption, connectivity such as e-commerce and healthcare.