Thursday, July 14, 2016

ASEAN - Look beyond Europe, UK for investment opportunities in equities

Brexit expected to help emerging markets as investors seek safer investments

As investors fret about mounting Brexit woes, and its impact on wider economies, and with the pound not showing any signs of recovery, fund managers are advising their clients to go slow and look elsewhere for opportunities.

Post a dead cat bounce witnessed last week after Brexit, global equities restarted their leg down again, and this time as they pondered the whole process of the exit, amid mounting concerns of sluggish growth despite the helicopter money thrown in by central banks to prop up growth.

Investors are looking for opportunities beyond Europe and the UK for more safer and predictable investments, feels Gary Duagn, chief investment officer at Emirates NBD.

“Attention has turned to the ASEAN region where GDP growth of 5 per cent is being maintained,” said Dugan. He mentioned Indonesia as the case in point. Indonesia is expected to witness higher GDP in the second half of the year as government spending picks up, thereby reinforcing investment spending.

“Indonesian equities have made new highs in recent trading sessions and remain well supported by Asian institutional fund buying. Indonesia bonds still trade at reasonable spreads over treasuries and should find more support, despite the likelihood of more debt issuance in the coming months,” Dugan said.

Among the data points, Indonesia’s short-term external debt fell to $38.1 billion (Dh140 billion), the lowest since 2012. Among other ASEAN countries, Emirates NBD’s Dugan feels that stocks in Thailand and Philippines were available for fair value.

Nadi Bargouti, managing director asset management at Emirates Investment Bank agreed to Dugan’s view.

“We have seen flows out of the UK, and we feel emerging market would benefit from this, so we would be net positive for emerging markets,” Bargouti said.

Even so far in the year, the emerging markets, which ASEAN is a part of, has outperformed the developed markets.

The MSCI Emerging Markets Index has advanced 5.7 per cent in 2016, compared with a 0.4 per cent loss in the MSCI World Index of advanced-nation shares.

Triggered by the underperformance, European along with UK markets have been downgraded by asset managers.

“We have been neutral on Europe and the UK, and for the UK the economic prospects have changed to the downside. We are cautiously monitoring these markets. We don’t see it a reason for change our neutral stance at least for a next few weeks for a better view of what will happen next,” Bargouti said.

Even National Bank of Abu Dhabi has decided to reduce Eurozone equites to underweight from neutral, while increasing emerging market bonds to overweight from neutral.

Distorting realities:

Fund managers have been also fretting about the easy monetary policy in the developed markets, on which the equity market rally has been based on, as they feel the QE has been distorting the economic realities.

“Easy money policy in opinion is not fundamentally driven. and we can’t expect central banks to bailout the markets indefinitely. Fundamentals have to improve to reflect the new market or economic conditions,” Bargouti said, adding “there is this disconnect between economics and the capital markets. This gap need to shrink either by fundamentals or central bank actions.”

Before the vote, Bank of England said they were ready with 250 billion pounds to maintain monetary and financial stability and take all necessary steps. The Brexit vote may also prolong the next hike from the US Federal Reserve, with analysts expecting one rate hike at the end of the year. In Europe too, analysts expect the ECB to extend the duration of the QE program from its early 2017 deadline.

“We were hoping to see an end to the whole quantitative easing business. That’s a frustration that equity markets would continue to be run by the central banks, which is not economically viable over the long-term,” he added.

Siddesh Suresh Mayenkar

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