Asia - The road ahead for the region´s markets

Global markets entered a period of volatility in Q2 2012 as elections in Greece triggered another bout of uncertainty in the Euro-zone, as fresh economic data spread doubts about the resilience of US recovery and as growth slowed in China, Asia’s economic powerhouse. Markets are increasingly being driven by a “risk on, risk off” mentality. Although many investors have chosen to sit out these uncertain times and wait for clearer direction, Fidelity’s Asia Pacific CIO John Ford points out the benefits of taking a long-term view and sketches the possible road ahead for the region’s markets.

JOHN FORD – CHIEF INVESTMENT OFFICER, ASIA PACIFIC
Q: How should investors aim to get through current volatility?
A: The best way to get through this current bout of market volatility is to take a long-term view. It’s going to be a fairly long and unpredictable process to the end game, whatever that may be. Uncertainty has started to affect economies beyond the Euro-zone. In that sense, the global outlook is quite bleak and economic growth is going to be subdued for quite some time. Having said all that, from a broader investment point of view, there are some positives. For example, not everything will be subdued – there will be pockets of growth. 

Q: Which asset classes are being affected and why?
A: Cash in most markets provides comparatively low returns - and in some markets it provides zero or even negative real returns. Bond markets are expensive – in fact some sovereign bonds are as expensive as they have ever been. Higher yield corporate bonds have come down recently, after investors piled into them in the search for income. Property markets are also generally speaking, expensive. Although commodities have come off their highs, they remain expensive. The only liquid asset class that you could describe at the moment as being cheap is equities – but people aren’t buying stocks because of the uncertainty and volatility.

Q: So what is the attraction of equities?
A: If you can look beyond the next year or two, equities can possibly give you an income of 3-5 percent or more, with the prospect of some reasonable growth over time. While that return is from an asset class that remains fairly volatile, if you have an investment horizon beyond the next year or two, that could still be a nice investment. It's really interesting as an investor to look beyond the next quarter, and even beyond next year. What if you can buy Shell, for example, on a 4.8% dividend yield and sit on it for say 5 years, taking that yield the whole time and perhaps make some money on the underlying equity as well. That's an exciting story when the alternative is to leave your money in the bank, where after inflation you'll probably get a negative return, or buy corporate or sovereign bonds without much of a return on capital.

Q: What is your favoured investment approach? 
A: To find the best pockets of growth, we recommend a bottom-up approach, assessing individual investment opportunities and individual companies. Most companies around the world are in good shape. Their dividend yields are well covered and sustainable and will form an increasingly important part of returns to shareholders. Some will provide more yield than others. For example, we are overweight defensive and consumer discretionary stocks, and in contrast, are underweight cyclical stocks.

Q: How are investors behaving currently?
A: Institutional investors in Asia - such as pension funds, insurance companies and sovereign funds - are increasingly investing in equities. Wholesale and retail investors will follow these institutions – eventually. Right now, retail investors are very much into cash and fixed income (high yield), but these flows will likely reverse into equities in future. It is just a matter of when. Smaller investors could follow the institutional lead and start preparing now for when the world changes and look beyond the immediate challenges. The US recovery has stuttered in recent weeks, but it could accelerate if supported by further (and likely) monetary and fiscal stimulus. This would then see China’s economy start to accelerate – which would then translate into more positive sentiment towards share markets.

Q: How resilient is Asia to the uncertainty in global markets?
A: Global investor sentiment is very volatile and is being driven by a “risk-on, risk off” approach to trading. We’ve had total inflows into Asia ex-Japan of about US$9.47 billion¹ year-to-date though, compared with US$31 billion of outflows last year. From a fundamental perspective, we continue to think that the corporate earnings story and the macro environment remain positive in this region. Gross domestic product (GDP) growth is slowing across the region but the growth we have is sustainable, and is very attractive in today’s two speed world when compared to the growth you’ll find in Western markets.

Q: Is China set for a hard landing?
A: In terms of China, we don’t expect a hard landing for the economy because the authorities have a lot of levers they can still use to either sustain or propel growth. Inflationary pressures have come down from last summer and the authorities can be either accommodative or remain tight in certain areas, such as the property sector, in order to maintain adequate growth. We think the key for China is not so much about growing at double-digit percentage rates -- it’s more about sustainable, inclusive growth.

Please see attached PDF document for more information and charts.

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