Defensive strategy is key
Markets may hate uncertainty, but in the unfolding economic crisis, any hope of a quick return to the comparative predictability of a pre-Lehmans world is best left unstated.
For equity analysts and investors, one of the few sure things is that the down cycle has some way to run. And, as a result, institutions and individuals must be ready to reappraise strategies and rethink their stance on acceptable risk and target returns.
'In the current market environment, with high volatility driven by fears over a range of macro and political issues, no equity sector is immune to share price falls,' says Alexander Kobler, head of investment products and services, Asia-Pacific, for UBS Wealth Management. 'However, certain sectors exhibit defensive qualities and can provide investors with solid returns over the medium term.'
Specifically, what Kobler looks for are companies offering a high-dividend yield combined with low payout ratios. Other signs are a strong balance sheet and a history of paying dividends throughout the economic cycle.
More broadly, and that means in a global context, he now sees Asia, ex-Japan, equities as offering most attraction. 'The valuations are undemanding and at levels below the historical average,' he says. 'That said, in a period of subpar global economic growth, we continue to favour the defensive sectors such as consumer staples, telecoms and selected reits [real estate investment trusts].'
Another trend to tap into is the growth of Asia's middle class, particularly on the mainland. This is seen to be driving sales of luxury goods, which remain strong despite concerns about other parts of the mainland economy.
In terms of stocks not considered 'buys', Kohler is equally forthright. 'For some time, we have been cautious on the Hong Kong banks, but we are now increasingly bearish on the outlook for the developers within the property sector,' he says. 'Notwithstanding the relatively attractive yields, we see headwinds in the form of rising mortgage rates, increased supply, and slower demand from mainland buyers.'
Maggie Tsui, deputy head of investment services, Asia, for BNP Paribas Wealth Management, suggests most equity investors will have their eyes fixed on Europe for the next few months. Rather than looking for buying opportunities, their focus is more likely to be when to sell and trying to interpret what further impact the euro-zone crisis could have on holdings in more distant markets.
'We think the economy in Europe will continue to deteriorate and, at this point, we are neutral on the US,' Tsui says. 'Our recommendations for clients are very much in Asia, though we try to avoid financial sector stocks because of the poor credit outlook and industrials which will slow down without US growth.'
Against that background, Tsui's preferred picks include Asia-based majors such as Japanese telecom group NTT Docomo, SingTel and PetroChina. Her playbook also features the more defensive stocks in the technology and utility sectors. 'We believe these companies will have a stable dividend policy, positive earnings, and some upside potential for capital gains,' Tsui says.
For Flavia Cheong, investment director - Asian equities for Aberdeen Asset Management, the sovereign debt crisis in Europe is challenging the whole concept of what makes a 'risk-free' asset. Equities as a class of investment will always carry an element of risk.
To mitigate that, she suggests one of the best tactics is to go for good dividend yielding stocks in Asia that offer defensive value. 'It is a moot point where safety now resides, but our concept of a balanced fund is fairly immutable,' Cheong says.
'It consists of 40 to 50 diverse, well-run stocks and our style of investing is very long term. We tend to stick with our holdings and simply adjust by taking profits or adding to positions as price movements determine.'
Right now, the search for income appears to be driving many equity investment strategies around the world. In contrast, Aberdeen is not only wary about paying over the odds for assumptions of growth, but also operates consistently as a buy-and-hold investor. The company is ready to wait out the economic cycle in the expectation of rising profits.
As a rule, the policy is to buy on fundamentals - management, balance sheets and cash flow - and to regard price, sectors and markets as secondary considerations.
'In our mind, equity investment is about capital growth,' Cheong says. 'Not everyone shares our approach; it does call for patience and self-belief. We tend to avoid capital intensive stocks where earnings can be 'lumpy' and companies that lack transparency. We really earn our money when others head for the exits.'