Wednesday, July 22, 2009
CLSA Strategy Report
Its been some time since I have read Chris Wood's strategy pieces. I like him quite a bit and his views are worth following. He is surprisingly bullish on Malaysia, Indonesia, the Philippines and China. I don't know enough about the Philippines, but I would rank my bullishness: 1) Indonesia 2) China 3) Malaysia 4) Thailand. Unlike Wood, I do like Thailand as well as I believe political uncertainty is the norm in Thailand.
Indonesia because of the Susilo's factor and the continued restructuring of its economy which will be a strong point in luring in long and short term foreign funds. China because of its deliberate liquidity pump priming, although I do see liquidity traps in second half of next year, it should first reveal itself in higher stocks and property prices. Malaysia because of its resource based, low rates, and this round of financial crisis did not hit private pockets that extensively (do read my piece on the stock market effects for Malaysia and how it has differed from the 90s experience).
I disagree with Wood when he said that deflation is a higher risk.
Rally will fail - The relief rally in Wall Street-correlated world stock markets should have one push higher. But it will fail in coming months amid renewed deflationary market action, as it becomes clear to investors that the Western world faces an extended period of structurally lower growth.
Deflation risk - Deflation, not inflation, remains the predominant risk in the West, as it follows the same mix of monetarist and Keynesian policies which have caused Japan to suffer 20 years of anaemic growth. But it will take time for these “orthodox” policies to be completely discredited.
Southeast Asia's emerging markets — Malaysia, Indonesia and the Philippines — should offer investors some of the best returns this year, given their strong corporate earnings and low interest rates, CLSA's equity strategist said in an interview yesterday.
Investors should steer clear of Thailand and Taiwan, which are riddled with political uncertainty, Christopher Wood told Reuters. He has a "zero" weighting on Thailand for his relative return portfolio, even though the index is at a five-month high.
"I'll get more bullish on Thailand if I see more local investors buying the market. Right now, all you see are locals selling," he said. "But if local confidence comes back, then there'll be a huge buying opportunity."
Wood, who joined CLSA in 2002, was top-ranked Asian strategist in financial publication Institutional Investor's annual survey in 2005 and ranked second last year.
Wood expects China's booming stock market, which has more than trebled since the start of last year, to rise further, even though it trades at an expensive price-earnings ratio of about 50.
"A full-scale mania in China shares is inevitable unless the government becomes a lot more aggressive, more than what it's been so far," Wood said, referring to the Chinese central bank's monetary tightening measures announced on Friday.
But Wood, in Singapore for a CLSA conference, said China should instead accelerate the listing of A-shares - off-limits to all but a few foreign institutional investors - and increase the supply of listed companies.
Wood prefers stocks that cater to domestic demand, such as consumer stocks, banks and real estate, but warned that commodity stocks could falter, if the US economy slows.
In other asset classes, Wood said investors are best off buying Singapore hotels , "the biggest no-brainer in Asian real estate" as average room rates are still lower than those of international hotels.
He said investors should also buy the Singapore dollar amid a private banking boom in the city-state, adding these customers might use the Singapore dollar as a reference currency on their accounts, if they lose confidence in the US dollar.
"The Singapore dollar is a fantastic long-term currency story. It's basically cheap," Wood said. "It makes no sense for the government to try and artificially hold it down."
Investors who want to hedge risk should "short" US securitised consumer and corporate debt, as this is cheap, Wood said.Asian stocks are not overvalued, despite their recent record-breaking rallies, but could face a downturn if credit spreads rise, Wood said.
"What's overvalued to me is credit spreads, not stock markets," he said. "To me, the risk in the world is credit spreads rising, in which case, there will be collateral damage in stock markets."
His views contrast with some fund managers and strategists who have voiced concern that record-setting Asian markets, particularly China, Singapore, South Korea and Indonesia, have climbed far beyond their proper valuations. MSCI's measure of Asia Pacific stocks excluding Japan has risen about 12% so far this year, compared with an 8.4% rise in the MSCI World index over the same period.
Gold remains essential insurance for those investors who want to hedge the systemic risks caused by the increasingly panicky responses of Western policymakers to growing deflationary pressures in their debt-burdened economies. Such longer term risks include the discrediting of fiat currencies and hyperinflation.
p/s photos: Fasha Sandha