9 January 2008
Business Times Singapore
(c) 2008 Singapore Press Holdings Limited
But financial advisors say the uncertainty should clear by the second half and markets should recover, writes GENEVIEVE CUA
STRAP on your seat belts and brace yourselves for a bumpy ride in the first half of 2008, say financial advisers. Client portfolios at a number of firms are being repositioned to preserve value, a marked shift after four to five years of robust equity gains.
Still, the uncertainty should clear by the second half and markets should recover, they say. The key now is to keep your cool, scout for value and deploy your money in stages.
Uncertainty over the pace of US and global growth, credit issues and the full impact of sub-prime write-downs continue to roil markets, and Asia has not been spared.
Since the start of January, global equity MSCI indices have been awash in red, a stark contrast to the strong returns of the past year.
Among the more optimistic is Albert Lam, IPP Financial Advisers investment director. The signposts of a prolonged recession, he says, are absent. These are: serious policy errors by central banks, real rates shifting far above economic growth rates, ridiculous stock valuations, and a collapse in economic growth.
'Even if the US went into a recession, it will be mild,' he says. 'For that reason, our long-term view is that the bull market is intact. But in the short term, due to news flow, markets will be volatile.'
The news relates mainly to questions over the extent of losses arising from sub-prime exposures; as well as US economic news.
For moderate risk clients, IPP has scaled up the exposure to growth funds from 25 to 33 per cent, and moved some of the fixed-income allocation into cash. IPP counts among the largest homegrown advisory firms with $870 million in assets under advisory.
Joseph Chong of New Independent says investors will need to take on a 'value mindset'.
'If there is a recession in the US, I think it will be shallow. Markets may see some upside in the first quarter.
'Our favoured region is Europe from a valuation standpoint. We like Asian growth but not Asian valuations. China and India are looking quite expensive.'
In 2007, the emerging markets and Asia were the top performers, trouncing mature markets resoundingly. Based on Lipper data, China equity funds delivered average returns of 47 per cent, for example, and India equity 55 per cent. The broader-based Asia ex-Japan region returned 27 per cent, compared with just 5.3 per cent for the average global equity fund.
Says Mr Chong: 'For investors who have a high risk appetite, this is the time to take risk.'
He points to the UBS/Gallup Index of Investor Optimism Poll as a contrarian indicator. It fell sharply in November to 44, less than half the January 2007 level of 103. It has declined steadily since May and has now reached its lowest point since September 2005.
'When the index is negative it coincides with a low point of markets. When the index is very positive, it's not a good sign as markets are about to turn down.'
At Providend, its model balanced portfolio has turned defensive. Chief investment officer Daryl Liew says a tactical shift is being made away from higher-risk markets towards sectors like healthcare and uncorrelated assets. 'The outlook in the first six months isn't too good. We see there is more potential for markets to correct than to go up . . . But we're quite positive about the second half. This slowdown will be temporary.'
Providend's moderate risk portfolio generated a return of over 8 per cent in 2007, and an annualised return of 10.4 per cent since 2003. The equity allocation was recently scaled down to 25 per cent, from about 40 per cent at mid-2007.
Also sounding a cautious note is Javelin Wealth Management chief executive Stephen Davies. 'We have been reducing our exposure to equities generally, and adding to gold and commodities . . . Investors have to be prepared for the possibility that 2008 may see negative equity returns.'
The firm's moderate risk portfolio is currently about 47 per cent invested in equities, 6-7 per cent in gold and about 5 per cent in commodities. The portfolio generated a return of 11.5 per cent last year, amid volatility of about 7 per cent.
'We're more positive about Asia and emerging markets, but recognising that the mythical decoupling (from the US) isn't going to happen. And it's probably not going to happen for the foreseeable future.
'We like these markets; we're inclined to pick them up at lower levels, but they're going to struggle just as much, if not more so, than developed markets.'
In a December report, Merrill Lynch chief investment strategist Richard Bernstein said the upward trend in volatility will continue in 2008, spreading to a broader range of asset classes. Volatility, he suggests, may not slacken until 2009.
He says 2008 should perhaps be dubbed the year of a 'global slowdown' instead of global growth. 'Disappointments seem likely in some emerging markets in which valuations appear increasingly extreme in the light of credit conditions.'
His suggested strategies for 2008 include high-quality bonds; large-cap stocks in the US or smaller-cap stocks outside the US; defensive sectors in the US or domestic demand sectors outside the US. He also suggests a more conservative mix of developed and emerging markets, as well as cash and high quality dividend strategies.
He tells investors to avoid 'value traps' - stocks whose valuations appear inexpensive but lack earnings momentum.
So what should investors do? Mr Lam of IPP advises drip-feed investing to take advantage of lower asset prices. 'If you have money, you could enter the market in tranches. Take advantage of the volatility but not putting all your eggs in one basket.
'By the end of the year, things will clear up and money will flow back into markets.'