By Aaron Low
27/5/2012
If there has been one constant worry on the minds of most investors over the past two years, it is the ongoing euro zone crisis.
It all started with Greece asking for a bailout in the middle of 2010 to pay its mountain of public debt, and has lurched from one crisis to another, keeping markets volatile in the process.
Next month, the euro mess could come to a head when the Greeks go to the polls again to elect a new government, the second round of elections in just months.
Some analysts worry that this could spark another chain reaction of sovereign defaults in various debt-ridden euro zone nations, leading to another financial crisis similar to the one back in 2008.
Others believe that those fears are overstated and that policymakers can manage the situation.
Markets will be affected but does this mean that investors should bail out of their positions now? Or are there opportunities in the making?
A Lehman Brothers moment?
Not for the first time in the ongoing saga, politics rather than economics will be the main factor driving markets.
When the Greeks go to the polls on June 17, the biggest question that analysts are asking is whether Greece will vote to stay in the euro zone or leave the monetary union.
The biggest problem is that no one, both within the European leadership and outside, seems to have a firm idea of what might happen, said Mr Mark Matthews, the head of research Asia at private bank Julius Baer.
'Leaders have been sending out mixed signals that do little to settle markets, or give clarity to what might happen,' he said at a recent seminar.
If the Greeks vote in a party which favours renegotiating the terms of the bailout package they have reached with international creditors, the likelihood of their leaving the euro zone will be high.
This could lead to contagion affecting other heavily indebted European countries, especially the large economies of Spain and Italy.
Essentially, investors could dump the bonds of these countries, sending bond yields up, and leaving these countries with even less means to pay off their debt.
A whole host of other complex financial instruments, such as credit default swaps, could be triggered, affecting financial institutions and insurance companies.
In short, there could be a high risk of a 'Lehman Brothers moment' if Greece's exit turns disorderly, said Mr Gerard Teo, head of strategy and currency at Fullerton Fund Management.
Back in 2008, investment bank Lehman Brothers collapsed, leading to the global financial crisis.
On the other hand, if the pro euro zone parties secure a majority in the Greek Parliament, there could be a bounce in the markets, said OCBC's head of wealth management, Mr Wyson Lim.
'However, this may only be a temporary reprieve as the problems in Europe are deep-seated and complicated and will take years to resolve.'
Indeed, even if the Greek problem is resolved, question marks still linger over the larger economies of Spain and Italy and their ability to pay their mounting debts.
Opportunities sprouting
Given the risk of another meltdown in the markets, not many analysts would advise investors to pour money into equities.
But the time to be brave could be right now, just when fear is rising, say some fund managers.
Mr Hugh Young, managing director of Aberdeen Asset Management Asia, said that this could be a good time to sink some cash into the markets, provided the investor has a long-term horizon.
Similarly, Mr Tim Stevenson, Henderson Horizon Pan European Equity fund manager, notes that valuations of European equity markets are at 30-year lows.
In fact, he believes in investing in European firms, quality companies that will be able to ride out the political crisis threatening to engulf the entire region.
But if walking into the lion's den is too frightening, then other markets also offer potential opportunities.
The Chinese stock market has been in the doldrums for the past two years and has underperformed its Asian peers.
But analysts are now saying that the beating it has taken of late makes that market one of the cheapest out there.
And although its economy has slowed down, analysts are now paying attention to whether Chinese policymakers will embark on another round of stimulus to prevent the economy slowing down too much. This could provide a fillip for the stock market.
Investment banks such as Morgan Stanley, for instance, believe that the 'bear phase for equities has ended', especially for mainland Chinese and Hong Kong stocks.
Morgan Stanley is expecting the Hang Seng Index to rise to 23,600 by the end of the year, from the current 18,608.05 - a 26 per cent rise.
In a note to investors, Phillip Securities Research also said that it believes the markets could experience a short-term bounce since markets have been oversold in recent weeks.
Another market to watch is the United States.
While economic data out of the US has not been great in recent weeks, Mr Matthews believes that the economy, as a whole, is on a stronger footing.
Manufacturing is continuing to expand, spending has held steady and even the housing market seems to have turned the corner.
The big question is whether the economy can create enough jobs to reduce unemployment further, said Mr Matthews.
Citing an academic report, he said that previously, when the economy had recovered from a recession, employment tended to recover in a V- or even U-shaped pattern.
This time, US employment has followed an L-shape instead and has not shown signs of recovering any time soon.
Still, he believes that US corporates remain, by far, the strongest and most innovative firms in the world and he is backing them to continue growing profits.
He is recommending a mix of both US value and growth stocks, such as drug firm Merck and tech firms Apple and Google.
The Great Singapore Sale?
There could also be bargains to be picked up right here in Singapore.
Mr Kevin Scully, executive chairman of equities research firm NRA Capital, said that stocks as an asset class, based on current earnings forecasts, are cheap.
'There is no need to panic when markets fall. View it as a buying opportunity - take the time now to identify which stocks and what levels you want to buy and wait patiently,' he said.
'But if you cannot stomach the volatility, then shift about 50 per cent of your portfolio into defensive yield plays.'
Mr Herald van der Linde, HSBC head of equity strategy, Asia-Pacific, said that in times of great volatility, the best thing is to return to the fundamentals of stock investing.
'Buy only when you see value; be patient and don't rush in,' he said.
aaronl@sph.com.sg
No comments:
Post a Comment