International | May 30 2006
By Chris Shaw (Tokyo)
With markets globally now showing high levels of volatility, ABN Amro notes even the professional investors have had their confidence shaken and are now less certain about the outlook for investment markets. Evidence of this is seen in the fact recent fund inflows have yet to be fully invested and money is now moving into asset and reflation plays in preference to momentum plays.
The broker notes this is a reasonable indication the global correction may yet have further to run, so it advises investors to look for signs stability has returned before attempting to hunt for bargains.
Danske Bank agrees caution remains the key, as while some stabilising of markets is natural after the volatility of recent sessions the risks in terms of the global economic outlook remain. These risks include a tightening of liquidity globally, lower global growth and the prospect of further falls in the US dollar. It suggests while the outlook for emerging markets themselves is little changed, all else has changed and so the bull market story in these markets is not as simple as it used to be.
ABN Amro shares this view, suggesting the recent volatility has moved risk factors to the forefront of the minds of investors, the broker highlighting the potential of higher US interest rates and a fall in global liquidity as a flow-on of higher interest rates in Japan as the key points to watch. The first risk is significant in the broker’s view as it suggests most market players are underweight US bonds and so could reverse this position if rates move high enough. With respect to Japan, it takes the position if rates remain close to zero liquidity should not be impacted.
In terms of where to look once the market settles down, the broker suggests the Asian story remains a liquidity driven one, as the region’s high savings plus a continual inflow of capital is a combination that will see liquidity levels increase. To benefit the most from this it suggests investors look to Asian assets, as in its view asset inflation will strengthen in coming years and asset prices are likely to move more quickly than will currencies or fixed interest investments.
Looking at its regional allocations, ABN remains overweight on Hong Kong, the Philippines, Singapore and South Korea but is underweight China, India, Indonesia and Thailand. Both Malaysia and Taiwan are rated as neutral.
Danske Bank’s view is emerging markets may in fact underperform developed markets in the months to come, so it suggests using any strength to reduce positions. It agrees with ABN Amro that bargain hunting is difficult in such an environment, particularly as global conditions should prove stronger than local factors in coming months.
Danske Bank suggests investors focus on quality and look to invest in countries with current account surpluses and where reform momentum is apparent, while avoiding what it calls "crowded trades" in illiquid markets. From a broader perspective it continues to like Asian currencies given the likelihood of ongoing strength in the Japanese and Chinese currencies, while it considers markets such as Turkey, Mexico and South Africa more vulnerable as these markets were the main beneficiaries of a higher appetite for risk but may not do so well as conditions change.
