David Ng
KUCHING: Investment uncertainty and market volatility concerns have led to queries whether this year’s bull-run will be followed by the bear market curse come year end or if this year is going to be different from the previous years in a scene similar to 2011 being a ‘déjà vu’ of 2010.
Addressing the scenario where markets had in the past trended down in the second and third quarter after a strong start to the year, Hwang Investment Management Bhd (Hwang IM) chief investment officer David Ng noted that essentially, the market’s fate could be summed up by understanding how the three major economies of the world (US, Europe and China) were doing.
“The US and global economy started to slow down towards the end of 2011’s first quarter. The case is different today as global growth is showing signs of uptrend. As proof, the International Monetary Fund (IMF) upgraded its global growth (GDP) forecast on April 17, 2012 to 3.5 per cent this year.
“US home prices are also showing signs of bottoming, its growth rate is better than expected at 1.2 per cent, and its lower unemployment rate is hovering at a lower rate of 8.3 per cent. In essence, this will lead to positive earning revisions, which we are already seeing in the recent upwards revision of Asian region earnings per share,” he observed.
Across the Atlantic, the European sovereign debt crisis had progressed from a stalemate to some form of positive resolutions compared with a year ago. At least the European Union could move on from fire-fighting to focusing on growth.
This did not mean that the structural problems had been resolved but it did provide some respite and enough confidence to the market to take on some risk, Ng opined.
“A quick look at China’s inflation number shows that the easing measure has kept inflation under control at around 3.6 per cent compared with 2011’s inflation which hovered stubbornly at six per cent.
“In addition, we believe China’s government can engineer a soft-landing for its economy this year as it usually tends to under-guide the market. Its reported GDP target for 2012 is 7.5 per cent, which we believe will be slightly more than that eventually.
“Besides, 7.5 per cent is an ideal and more sustainable rate compared with the nine to 10 per cent rate in the past decade,” he revealed.
According to him, the market was still flushed with liquidity at the moment as the ultra-low interest rate environment in the US would continue until end-2014 compounded by the easy refinancing terms by the ECB, and China government’s monetary loosening phase.
When the market was flooded with easy money or credit lines, it was natural for sentiment to improve and the confidence to gravitate towards taking on more risk. Liquidity was an important factor as it would provide support and an additional leg to the market.
“In other words, should there be any correction it will be shallow, as investors that were caught short in the recent rally will take it as buying opportunity.
“However, we do not proclaim everything to be hunky-dory as there are risks such as Spain’s debt, Iran’s oil risk and of course, the heightened political risk in Malaysia with the coming of the General Election.
He revealed that Malaysia was in a consolidation phase now, whereby markets would go up by 15 per cent to 20 per cent before declining over and again as there was uneven growth across the world on the back of unstable structural issues that had yet been resolved.
“The debt and growth problems in the developed market will take years to resolve which means, we will continue to see volatility in the markets during this consolidation period.”
The questions that remained was should investors invest now and if so, where? All the above pointed to the equity markets being in a sweet spot.
Asia was the place to be in given its relative healthy economic fundamentals and strong corporate and government balance sheet compared with the developed counterparts, Ng said.
“The recent positive earning revision in this region confirms our call. Additionally, the improving macro-economic picture will provide the market with the confidence to take on more risk and this risk-on mode will power the next leg up.
“As such, it makes investing sense to have 20 per cent to 30 per cent equity exposure in your portfolio over the next few months, if you do not already have such. In such an environment, portfolios with strong stock picks will do well.
“Lastly, average-in and avoid timing the market as nobody, even the best investment professionals, can time the market to buy at the absolute low and sell at the absolute high,” he concluded.