Cloudy with a chance of pain

PUBLISHED : Monday, 02 January, 2012, 12:00am
UPDATED : Monday, 02 January, 2012, 12:00am


It's time for the investment outlook reports. Virtually every broker, wealth manager and investment book will be expressing a view on this year that intrepidly stakes out that excellent middle ground between caution and optimism.

Can the average investor glean much that is useful from these reports? Honestly, no. The views will be irredeemably overtaken by events within weeks. You could read the reports as a block and pick out key themes, but that takes time, so we've done the work for you.

Nomura: Its year-end tome, titled '2012 Global Economic Outlook', comes in at a strapping 89 pages. Its entire focus is on euro-zone issues, which holds that a flawed monetary union has tipped Europe into a recession which is dragging down the rest of the world.

The report is the most downbeat of the bunch, projecting less than 8 per cent growth for China, declining growth in Hong Kong and a recession in Taiwan.

'Being a small, open economy and a financial hub, Hong Kong is one of the most vulnerable economies in Asia to a global economic downturn,' says Nomura, which projects local gross domestic product (GDP) growth will slow from 5.3 per cent last year to 2.8 per cent this year.

Nomura globally sees a lot of potential crises in the world that could blow up. It recommends hanging on to cash and to mop up cheap assets following a major sell-off.

CLSA: The local brokerage is well known for its highly readable reports. Its Asian economic outlook for the first quarter of this year, titled 'Kicking the Can Down the Road', is not one of them. It is dense and technical, suffering from a need to explain everything.

The outlook piece is preoccupied with the issue of leverage; for example, China's ability to create more lending in the face of a slowdown. CLSA is concerned with the health of China's export economy in the face of a slowdown in Europe and weakness in the US.

It sees growth slowing in China and projects that this will be addressed with credit growth, or more state-directed bank lending. This means the mainland economy largely will be in the hands of policymakers this year.

The message to investors is to wait and see what shakes out of the Beijing decision-making process, and decide from there if any investment makes sense.

Citigroup: Its report, tersely titled 'Prospects for 2012', foresees slower growth in Asia. It expects Asian governments and central banks to counter that by rolling out stimulative policies, such as spending on infrastructure and cutting interest rates.

Its base case for Hong Kong is for the city to 'muddle through without technical recession', as the bank glumly puts it. This view holds that Hong Kong is vulnerable to the global economic downturn given that 27 per cent of the local labour force work in the trade and logistics sectors.

It sees continued strength for the city's mainland-powered retail boom but worries about the possibility of a sharp fall in property prices.

Standard Chartered: StanChart's global economic outlook, 'Fragile West, Resilient East', strikes a hopeful note for Asia. The 128-page manifesto whips through the big markets of the West and Japan, and then provides detailed country reports for Asia, Africa and the Middle East. It is mercifully light on euro-zone issues, devoting roughly as much space to Ghana as to all of Europe. This contributes much to the report's readability.

Given the bank's focus on emerging markets, it is something of a booster for the region, projecting a lot of growth or at least resilience for EM nations.

The bank projects a two-speed global economy, with a recession in Europe (GDP contracting 1.5 per cent), below-trend growth in the US (of 1.7 per cent) and still-robust growth in Asia (of 6.5 per cent). The bank foresees slowing but still respectable growth for China, at 8.1 per cent, and Hong Kong, at 2.9 per cent. However, it expects Hong Kong's housing market will be subdued.

HSBC: The bank's year-end report, titled 'Looking Past the Abyss' focuses on the euro-zone sovereign debt crisis and expectations of slowing growth. Broadly, the report argues in favour of equities and against government bonds on the view that the former was oversold last year and the latter overbought.

But HSBC is bullish on most assets. It likes equities, currencies, commodities, corporate bonds and US dollar Asian bonds. It is neutral on gold and government bonds from Europe and the emerging market. It is explicitly negative only on US Treasuries.

The bank acknowledges the world is rife with short-term risks, the outcome of which is largely 'in the hands of politicians'. However, those able to buy now for the long term are likely to capture cheap assets, the report concludes.

Credit Suisse: A report entitled 'Top Asian Investment Themes for the Year of the Dragon' also fixes on the issue of the euro-zone crisis. The report takes the middle ground of risk, as was the common recommendation last year. It likes high-yielding stocks, for example, on the view that interest rates will remain low, and investors will see value in the income earned from dividend shares.

The bank also favours 'policy-easing plays' in Asia. The view is that Asian central banks will move away from a worry about inflation towards a greater concern about growth. That means cheaper credit, which should be beneficial to Asian stocks. Credit Suisse, in particular, projects a cut in China's reserve requirement ratio (the amount of customer deposits banks must hold as cash), which will boost equities.

Credit Suisse equity research sees value in Asia-Pacific stocks, except Japan's. Its outlook points out that this sector is attractive as current valuations (a price-to-book average of 1.52 times) are near 2001 recession levels (of 1.4 times). The report points out that Asian markets are 'pricing in a recession, but not a financial crisis'.

In the US market, Credit Suisse highlights one theme: buy JP Morgan, on the view the bank is outpacing its peers.

Goldman Sachs: In a recent report, Goldman Sachs pinned down its top six trades for this year.

The bank suggests shorting 10-year German government bonds. This trade is based on the view that the euro-zone credit risk is being shifted to core euro-zone countries, such as Germany, as these countries must bail out the likes of Greece, Spain, Italy, Portugal and Ireland.

So what can the typical investor take away from all this? For outlook reports, these documents are unusually negative. They dwell on the euro-zone crisis and on the Chinese economic slowdown. These are indeed two big drags on markets for which there is no quick solution, so take that as a sign.

The US economic slowdown is also a concern. Surprisingly, perhaps, given recent positive data coming from the US, the reports do not spend much time on the possibility a resurgent US economy could turn around global markets. That may be because such an event is unlikely, or because analysts have not yet incorporated the possibility into their thinking.

In Asia, the outlook reports' persistent query is the extent to which China can engineer an economic rebound with market-friendly policies that, for example, increase bank lending to small to medium-sized private firms.

Hong Kong is widely tipped for slower growth (but not recession) as global trade slows, and there is less need for its services as a re-exporter of mainland goods. Mainland shopping tourism - an increasingly crucial part of the local economy - will continue to boom this year, but the housing market looks wobbly.

Some opportunities do exist for the careful investor operating with the full guidance of a top investment adviser ... unless Europe unravels. Or China goes into recession. Or the US Congress careers into a budget crisis. Or maybe not.