With the medium-term Asia growth story intact, there still remains value in equity markets, Benjamin Yeo, Barclays’ investment strategy head for Asia, tells Puneet Wadhwa. Edited excerpts:
Do you think global equity markets could see a calmer second half of the year, as they assess the macroeconomic headwinds and await the outcome of the US Presidential elections?
At the start of the year, financial soothsayers were divided in their forecasts for the market trend. Those still buried in the debris and doom of the past year could not see light at the end of the tunnel. The courageous ones hedged that while key risks would continue, the second half could see some recovery.
Thus, the overall performance of Asian equity markets has certainly confounded and confused these soothsayers as they refocus their gaze on the crystal balls. Perhaps, it is timely to take stock of the current economic and market situation.
Fundamentally, investors’ focus will vacillate between the cyclical driver of global growth and the issue of structural debt in the euro zone; with increasing attention being drawn towards the marginal improvement in the US economy.
How stable is the global recovery? Are we completely out of the woods?
Year-to-date, the flurry of Organisation for Economic Co-operation and Develo-pment data from the US and even Europe seem to confirm a near-term, cyclical trough in the last quarter of 2011. More importantly, forward and leading indicators suggest improved economic activities and stronger exports from Asia.
At Barclays, we believe the global economy is at an inflexon point, as trade is gradually coming back. However, one has to be mindful of the key risks which may threaten the tentative recovery, in particular, any sentiment spillover from a sharp deterioration in European growth.
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Unless revenue growth picks up significantly in 2012, US corporate earnings may be peaking soon. Further, if oil prices continue to spike up from their four-quarter low on the back of the turmoil in West Asia, it may derail recovery.
What is your interpretation of the recent Purchasing Managers Index (PMI) data from China and statements from the Indian and the US central banks?
In the first two months of 2012, headline PMIs across various regions, except the euro zone, marginally crossed 50 per cent. Asia is, at best, still in the early stages of recovery as the headline PMI in India, Korea, Taiwan and Australia is still well below the average recorded since 2004.
In addition, the underlying trend of global PMIs remains mixed as the difference between new orders and inventories, a key indicator of future economic activities, is yet to turn up decidedly across the board.
The Asian economy may have turned the corner after the depressed sentiment seen in the fourth quarter, but any recovery is still, at best, tentative. Recovery is yet to be more entrenched as there still exist risks that may re-surface to challenge policy makers.
Do you believe the current valuations have factored in all these concerns and the positives?
We believe the current valuations have already reflected the marginal improvement in the fundamental economic and growth outlook. There are still doubts on the sustainability of the US as well as the global recovery, in particular, the concerns over how the euro zone could potentially puncture the tentative upswing.
Though valuation has become less cheap, it is nonetheless attractive, especially for investors with a longer investment horizon. We could see bargain-hunting for oversold stocks, especially by smart and institutional money.
Volatility is likely to continue at lower levels until the global picture becomes clearer. From the current low-valuation levels, with any continued fundamental improvement, there could be legs to the current market upward trend.
In the Indian context, which sectors/themes/stocks still offer value from a medium-term perspective?
It remains tough to time the market, but for longer term investors, there is still value in equity markets as the medium-term Asia growth story remains intact. The suggested investment approach is to pick up companies with sound business and revenue models selectively.
At Barclays, we recommend that investors initially seek to attain exposure to the more cyclical sectors like consumption, followed by longer duration ones such as infrastructure. They must exercise caution when chasing the momentum of the day; the sharp share price recoveries of select stocks are mere recoveries from extreme over-sold positions.
