There's something about equities

PUBLISHED : Monday, 25 February, 2013, 12:00am
UPDATED : Monday, 25 February, 2013, 2:14am


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Happy days are here again for equity investors. That's the message from a growing number of folk in the investment business, and they are putting their money where their mouths are. The year got off to a flying start in January with the FTSE All-World Index Series - which tracks equities - touching its highest level since June 2008. Despite a blip last week the resilience is likely to continue.

The big investment theme of 2012 - government bonds - has lost its lustre because of frustration with low yields and suspicion over high levels of currency manipulation by some of the biggest bond issuers.

As for my pet hate, gold and gold fanatics (who no doubt will write another round of e-mails urging this column's demise for not supporting their fanaticism), well, what can I say? The plain fact is that despite the famous economic uncertainty that is supposed to be good for gold prices, it is in the doldrums.

This is not to rule out the chance to buy gold in the future, but as an investment theme it doesn't pass muster.

The strength of equities, however, is underpinned by increasing merger and acquisition activity, the kind that takes place when publicly listed assets seem to abound at bargain prices. This was the view of Warren Buffett with his recent US$28 billion bid for the food group HJ Heinz. Comcast has recently joined a clutch of dealmakers in the media sector by buying General Electric's stake in NBC Universal.

So, what is it about equities right now? There is optimism over the end of the recession as key economies, notably the US and Germany, not only move into economic growth but, and this is where market psychology kicks in, do so at a faster rate than had previously been expected. Markets move on expectations, not facts.

Even in Japan, where the Nikkei 225 has long been regarded as the ugly sister of the big stock indices, optimism is rising, and long bets are being taken on the renewal of Japanese corporate strength. With aggressive government backing, Japanese companies are back, armed with a more competitive currency, and credit lines that facilitate growth.

However, such is the contrarian way of investors that they spent most of last year shunning the market that is home to the only major economy that is showing serious growth. This, of course, was China and, as a result, Chinese equities are trading on seriously "cheap" pricing ratios.

The average price-earnings ratio in Chinese shares is now below nine, that's almost half the level in most major markets. Meanwhile, the average yield kicks in at more than 3 per cent, about a third higher than in the US.

As ever, important caveats need to be mentioned when discussing Chinese equities, because this is far from being a normal market owing to the high level of state ownership of major corporations and the state's inclination to intervene in corporate life in unexpected ways. There is the usual scepticism over mainland economic growth figures and, perhaps more importantly, a worry that the long growth cycle is about to be reversed. This is not going to happen tomorrow but the prospect lingers, and investors need to decide how much of a commitment they wish to make to such a market. Still, the current case for Chinese equities is very strong and most easily accessed via exchange-traded funds.

But even equity enthusiasts like me cannot feel secure in ditching bond investments right away. There is always the danger of following the herd, and getting left behind as the stampede gathers pace, persuading those who got in early to make a swift exit, leaving latecomers with overpriced assets. We are not yet at stampede levels in equity markets, but a bit of hedging with bonds will do no harm.

Meanwhile, the Buffett play for Heinz gives food for thought. His preference for companies with a strong recurrent business and solid earnings is well known, and sent me looking around the Hong Kong market for some equivalents. Aside from the utility companies, there are not many which fit the bill.

Even stocks like MTR Corp are hardly simple transport plays, because of extensive property holdings. So take a look at AIA, an old favourite, and the less than fashionable Johnson Electric is worth considering.


Correction Last week’s column reported that Richard Li Tzar-kai sold 22.6 per cent of his shares in PCCW to Francis Leung in 2006. That is incorrect. Li tried to sell  the shares to a consortium led by Leung, but the deal was blocked by shareholders.