Lehman Brothers

Navigating the numbers

PUBLISHED : Tuesday, 26 June, 2007, 12:00am
UPDATED : Tuesday, 26 June, 2007, 12:00am

MAINTAIN YOUR COURSE, but trim the sails and keep a sharp lookout for signs of an impending storm. In a nautical nutshell, that is the advice of the equity analysts canvassed by Net Worth. They remain positive about the prospects for share prices in the region as investors sail into the second half of the year.

'A key investor concern in the first half was whether the economic slowdown in the US would gain momentum. But we are positive and expect a more material re-acceleration of US growth towards the end of year, and believe that equity markets in the region will reflect this continuing growth momentum,' says Fan Cheuk-wan, head of Asian equity research for the private banking division of Swiss investment bank Credit Suisse.

But in the near term, brace for a choppy ride as some overstretched markets undergo modest, temporary corrections.

Ms Fan's view that the global equity bull run will end the year intact despite a few hiccups on the way, and that investors should therefore keep faith in their share portfolios, is widely echoed by other market analysts and economists who spoke for this edition of Net Worth.

'In Asia we see continuing strong momentum and economies that are increasingly decoupling from the US and can therefore better cope with a US slowdown. As a result Asia remains in relatively good shape, with strong corporate earnings growth,' says Yonghao Pu, managing director and chief regional economist, UBS Wealth Management.

And this is a view shared by Eleanor Wan, chief executive of Allianz Global Investors Hong Kong.

'Our view of the global economic picture is that despite lots of talk regarding a slowdown or recession in the US, the data shows that the global economic outlook remains robust. We foresee no big corrections or turbulence in equity markets, which remain in a healthy mode,' Ms Wan says.

In search of a black cloud that might lurk inside this silver lining, Lehman Brothers analyst Rob Subbaraman wonders whether a sharper-than-expected US economic slowdown or a blow to investor confidence might derail a recovery in Asia that is now heading for its 10th anniversary since the financial crisis of 1997/98, and due to mark up aggregate gross domestic product growth of about 8 per cent in 2007.

Confidence, he cautions, could take a hammering if existing strong capital inflows into the region are suddenly reversed as a result either of a crash in China's equity market or an unwinding of the yen 'carry trade'.

'[But] the good news is that Asia ex-Japan has plenty of room for policy responses if either of these two risks materialise,' he says, adding that with government coffers around the region filled with surpluses there is ample room for fiscal stimulation, while generally low inflation rates will also allow central banks to cut rates.

A third risk identified by the Lehman research team - of strong capital inflows putting upward pressure on currencies - is seen by others as underpinning a rise in asset prices around the region in the second half.

'With the renminbi moving up, other Asian currencies will be dragged higher. In anticipation of these currency gains, we will likely see a flood of capital into these markets - including Singapore, Taiwan, Malaysia and Indonesia - which then becomes a self-fulfilling prophecy and will push up prices of equities, property and fixed income,' says Arjuna Mahendran, chief economist and strategist Asia-Pacific, private banking division, Credit Suisse.

In its 'Economic Outlook' published last month, the Organisation for Economic Co-operation and Development, forecast fair weather ahead for the global economy.

'Indeed, the current economic situation is in many ways better than what we have experienced in years,' chief economist Jean-Philippe Cotis notes.

'Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India.'

While investors with a longer-term horizon should take comfort from the wide consensus that global economic growth appears to be secure, their portfolios could be buffeted by short-term volatility as markets digest continuing data releases.

Analysts warn that renewed pressure on oil prices and a surge in petrol prices to a record high in the US would add to concerns over a slowdown, and that data on home sales in the world's largest economy could drive negative sentiment.

The Federal Reserve remains on the alert against possible inflationary pressures, warns Thomson IFR chief economist George Worthington, who concludes that cuts to US rates could therefore be still some way off.

'Meanwhile, changes to China's monetary policy, including a rise in interest rates, a widening of the renminbi's trading range and a further increase in reserve requirements, are unlikely to be the last from the People's Bank of China as it tries to slow the surging economy,' he says.

But given the wider macroeconomic picture on the mainland, and the high multiples of plus-40 times at which many China shares are trading, such ongoing regulatory measures are to be expected, say analysts.

In these circumstances, investors with a heavy exposure to China equities ought to prepare for short-term volatility, they say, and one way would be to underweight their China portfolios and reinvest their money elsewhere in the region.

'Hong Kong investors are focused on the China market and I sense may have become a little blinded as to what is going on elsewhere because, in my view, we are probably in the middle of a big equities bull run on a global scale, says Carl Berrisford, equity product specialist for North Asia, ABN Amro Private Banking.