With global outlook grim, cash 'safer' than equities

PUBLISHED : Monday, 10 October, 2011, 12:00am
UPDATED : Monday, 10 October, 2011, 12:00am


Cash is once again king. Amid a deteriorating global economy, private banks and wealth managers are warning clients to stay away from equities, forecasting that more risks are on the horizon.

Hong Kong stocks are now firmly in bear-market territory, with the Hang Seng Index losing almost 25 per cent since the start of the year. A downturn of more than 20 per cent in a market over at least a two-month period is considered an entry to a bear market. Masses of investors are now seeking redemptions from equity funds.

Emerging-markets equity funds carried a nine-week US$20.6 billion outflow streak into the third quarter, according to US-based research company EPFR. Redemptions from emerging-markets bond funds meantime set a weekly record, exceeding US$3 billion.

'We have been advising clients to lower their risk exposure since early August when it became more obvious to us that the EU debt crisis was intensifying,' said Stephen Corry, head of Asia-Pacific investment strategy for LGT (Hong Kong).

Corry said global equity valuations were cheap and sentiment was weak, a combination that would normally make fund managers more upbeat. 'But until we see a more credible resolution to the EU debt crisis, we are likely to stay on the sidelines for the time being based on current valuation.'

Analysts have all downgraded their forecasts for economic growth, saying the risks of recession are higher and economic recovery will remain lacklustre in coming years.

What is more, faster-growing emerging economies in Asia have not translated into outstanding equity performance. While the Standard & Poor's 500 Index has lost 8.69 per cent so far this year, the MSCI Asia Pacific Index dropped 15.76 per cent.

'There's more downside [in emerging markets] when developed markets correct,' said Philip Jehle, managing director for Lombard Odier Asia. 'Gross domestic product is a poor indicator of stock-market growth.'

Hong Kong stocks, which include mainland firms traded on the city's bourse, are now trading just above nine times earnings after a series of sell-offs. That compares with the historical average of 14 times earnings.

But with risk aversion high on the agenda, few investors are tempted to put their money into equities. According to the Hong Kong stock exchange, average daily turnover for securities listed on the main board and growth enterprise markets for last month was HK$71.14 billion, 10 per cent down from August's HK$78.78 billion, indicating thinner liquidity going into stocks.

'Interim results for banks and property developers are good,' said Wendy Liu, head of China research at the Royal Bank of Scotland. 'But people don't believe those numbers.'

Jehle recommends that clients maintain somewhere between 15 and 20 per cent of their assets in equities, 50 per cent in corporate bonds and the rest in cash. 'Don't get into structured products. Stay in liquid assets.'

Since the US Federal Reserve announced its plan to swap US$400 billion worth of short-term debt with longer-term treasuries to offset the growing risk of a recession - the so-called Operation Twist - the dollar has become a hot property as investors sell their holdings in other assets and buy up the greenback. The stronger US currency attracted US$3.57 billion flowing into the US bond market in the last quarter, according to EPFR.

Corry said a strong dollar was a negative for liquidity in Hong Kong because when the greenback appreciates, it takes capital away from Hong Kong assets such as stocks and real estate.

But advisers are not asking their clients to cut equity exposure completely. Adam Tejpaul, head of investments at JP Morgan Private Bank in Asia, said it had not changed its recommendations over the past two weeks and had advised clients to focus on higher-quality names.

Corry said investors should watch out for companies with stable earnings, including those offering high yield in the telecommunication and utilities sectors.