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Monday, September 16, 2013

Time to look for good-value buys?

The Straits Times
Goh Eng Yeow

FED up with the US Fed? For investors burnt by recent declines in stock prices, the United States central bank looks like a convenient scapegoat to blame for their woes.

The Federal Reserve's vast stimulus programme has helped to fuel a year-long rally in global equity markets.

But Fed chief Ben Bernanke pricked that bubble in May when he flagged the likely scaling back of this stimulus.

Some believe that if Mr Bernanke had said nothing, the recent precipitous sell-off may have been avoided - at least for now.

But closer scrutiny suggests that the Fed's role may have been overstated.

The real villain may not be the Fed but a host of other issues, which have been dogging the worst-hit markets for some time.

One big factor is a lack of good corporate governance practices which investors tend to overlook, doing so at their own peril.

Too often, investors take too narrow a view of governance, failing to appreciate that it extends beyond the corporate arena to include the rule of law, political freedom and the robustness of a nation's institutional framework.

But when the tide of cheap money recedes and investors turn their back on emerging markets, the flaws become all too obvious - India's political sclerosis, Brazil's credit worries and Indonesia's excessive deficit.

Still, as the dust settles on the indiscriminate sell-off which initially battered emerging markets everywhere, some markets, such as Taiwan and South Korea, have been luring investors back into their fold.

Both are export-oriented economies with healthy trade surpluses, which should help shield them from the withdrawal of the Fed stimulus - whenever that comes.

And the strong institutional framework they have built up since the Asian financial crisis 15 years ago offers another layer of comfort to investors.

Then there is the fixation over China.

Now that the days of China's double-digit economic growth are over, the worry is that the super-commodity cycle triggered by the mainland's insatiable demand for raw material has come to an end.

That has taken a toll on commodities-heavy markets such as Brazil, Indonesia and Australia.

Mr Jeff Shen, the head of emerging markets at US fund manager Blackrock, said in a recent note that the fixation over short-term performance was what led investors to adopt a commodity-based strategy that rests on China's demand for raw materials.

So every time China's manufacturing data flags a slowdown in factory activity, it inevitably triggers a big debate as to whether the mainland is handed for a hard landing - and an almost inevitable sell-off in shares on regional bourses.

But Mr Shen has this advice to offer: "In reality, it is more important to look at how successful China is at changing its economic model and to match your investment horizon to the long-term horizon it is taking."

For investors, it is more important to focus on issues such as sustainable growth and corporate cash flow, rather than try to time the market swings, he said.

Of course, that is not to say the end of the Fed easing does not matter.

Emerging market assets have been boosted to recent high levels by investment flows that were artificially strong, as traders and hedge funds took advantage of the cheap greenback to put money where it could earn a higher return.

But even as the US Fed turns off its liquidity tap in the months ahead, the risk of another financial disaster, similar to the one that hit South-east Asia in 1997, is remote.

Asian countries sit on huge war chests of reserves and a lot of their debts are now denominated in local currencies. That means it may be possible for most of them to survive the withdrawal of the Fed stimulus without triggering a painful recession.

But just as countries' fortunes will diverge once the US Fed brings its vast money-printing programme to an end, so will individual companies'.

As this new phase unfolds, issues such as company fundamentals, stock valuations and corporate governance will start to matter again to investors, to a much greater extent.

For value investors who have the patience to hold for the long term, it may be worthwhile looking for stocks to pick up again, rather than trying to time the market.

The heady days of buying an index fund to ride on the broad emerging market rally may be over, but there are many corporate gems going at pretty attractive prices waiting to be unearthed. Maybe it is time for investors to start digging hard.

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