The market's doing quite well, actually

PUBLISHED : Sunday, 11 March, 2007, 12:00am
UPDATED : Sunday, 11 March, 2007, 12:00am

Despite the blows suffered recently by investors, there's still room for growth in the equity markets

Feeling a bit bruised and battered by the market's raucous ride in the past two weeks? Wondering if you should just go into cash, hiding until there's another celebrated bull market to ride?

There are as many answers to your quandary about portfolio allocations as there are investment advisers, and even they may not be able to point you in the right direction until you decide whether you've had enough risk for now or you're willing to face the risk of another storm.

The Hang Seng Index and the Shanghai Composite Index both plummeted by more than 10 per cent in little more than one week on fears that both the valuation of mainland companies and the nation's growth rate were too good to last.

Any investor who was overweight in Asian equities - and who wasn't? - took a kick in the pants when the markets lost their collective courage.

For some investors and advisers, that just offered more opportunities, in the belief that equities are still the quickest way to the top, particularly if you're betting on the China story.

'We remain positive on equities for this year, and what happened in the past week or so was because the market got overbought in the last quarter of 2006. We still believe there's good growth in store for the global economy this year,' said Leo Cheung, head of direct sales and investor services at JF Asset Management.

Mr Cheung suggests US large caps remain good value and that European corporates are also a good buy since the region is still in merger-and-acquisition mode. In Asia, he sees the best value in China, Indonesia and South Korea.

Others take a more conservative view, predicting that the bull market is nearing its end and they advise taking cover in companies that pay strong dividends and have lower price-to-earnings ratios.

'The fact that things have settled down is a good reason to rebalance instead of doubling up on your most risky bets. Use the opportunity to reduce risk and go into more defensive positions,' said Anantha Nageswaran, head of Asian and Middle Eastern investment research for private bank Julius Baer.

'The global economy is actually doing quite well, so it's not a question of being a pessimist. Rather, the past three to four years of bull markets haven't left many great bargains out there.'

There was still some value in Taiwan, Mr Nageswaran said. Dividend yields of seven to 12 per cent are within your reach if you invest in companies such as Formosa Chemical and Fibre Corporation, Nanya Technology Corporation and Yang Ming Marine Transport Corporation.

While not recommending South Korea as a country play because of its overly strong currency, Mr Nageswaran said shares in companies such as Hyundai Heavy Industries and Korea Electric Power Corporation would also offer solid, stable returns.

As a country play, he likes Thailand. While there is still concern over the regime's handling of the economy, money managers like Marc Faber, aka 'Dr Doom', see the current valuation of listed companies as too good to turn down.

With global economic growth still ploughing ahead, Mr Nageswaran said commodities remained a good investment, especially since many key markets followed the global equity decline, creating good buying opportunities.

'As for emerging markets by and large, you can't go in blindly anymore. You have to be a bit more discerning,' Mr Nageswaran said.

For wealthy investors with access to products that are not distributed through the normal retail banking channels, there are a few more options to consider when the markets bite back.

Christophe Lee, chief executive officer of SHK Fund Management, a hedge-fund company, said any portfolio looking for decent gains must still consider equities, and emerging market equities in particular.

For those in 'stay rich' mode rather than in 'get rich' mode, the traditional avenue of fixed income has little allure, as credit spreads remain tight and no big interest rate changes are on the horizon.

'Funds have sort of replaced bonds in many people's portfolios, and that looks like a pretty smart way to think,' Mr Lee said, pointing to the funds' average returns of 7 to 9 per cent and low volatility.

A similar option is an asset- backed fund, which lends money against collateral, such as credit card receivables or real estate. They return around 10 per cent a year, have low volatility and very little correlation to other asset classes. But you'll have to invest around US$50,000 (HK$391,000) to get into the game.

'People need something in their portfolio that will work when nothing else is working,' Mr Lee concluded.