Buy Asian stocks on dips: Merrill, Barclays

Business Times - 30 Jul 2009

Equities ex-Japan are up 49% from March, markets look fairly valued

By GENEVIEVE CUA

INVESTMENT strategists from two banks are calling on investors to buy Asian equities on dips as valuations are no longer cheap.

Stephen Corry of Merrill Lynch Global Wealth Management, who has been talking to clients in the region on his second-half outlook, says that the group's preference is for Asian equities and emerging markets.

'We'd rather participate on a pull-back,' he says. 'For Asia ex-Japan, our strategist believes Asia is pricing in a very sharp cyclical recovery - an ISM (Institute of Supply Management) close to 60. It's currently at 45. So there's not much room for error. We'd rather buy at lower levels, although we continue to believe there will be capital flows.'

The ISM index is an indicator of the health of the US manufacturing sector and economy.

Barclays Wealth Asia strategist Manpreet Gill says: 'We continue to believe that Asia remains the most dynamic region. Right now, (markets) are riding on the momentum of earnings upgrades. When that fizzles out, where do we go? There are compelling reasons to use market weakness to add to exposure.'

Asia ex-Japan equities have risen about 49 per cent since March and 17 per cent year-to-date, and markets look fairly valued. 'It is timely for investors who have no significant exposure to Asian markets to add some,' Mr Gill says. 'Those who entered these markets early should consider taking profits and trimming positions back to a modest overweight allocation. Above all, investors should start being more selective with respect to countries, industries and companies.'

Barclays sees the most scope for further outperformance in China, India, Singapore, Hong Kong and Thailand.

Mr Gill does not expect inflation to pose a significant threat, but inflation expectations may be an issue. Barclays Wealth has an overweight on inflation-linked bonds and is scaling back allocations to global treasuries.

Merrill's Mr Corry suggests that any equity market correction may well be 'short and small in magnitude'. This is because, based on Merrill's monthly survey of asset allocators in July, allocations to equity are at a 'very small overweight' compared with a large overweight in 2007. This was whittled down to a 'huge' underweight at the beginning of 2008.

The survey found that asset allocators' cash levels rose in July from 4.2 per cent to 4.7 per cent. Globally, high net worth individuals are holding an average of 21 per cent in cash in portfolios, which is significantly higher than three years ago, he says.

'Cash generates minimal returns. Our chief strategist in New York estimates that if you put money in three-month Treasury bills, it will take you 360 years to double your money. Retail clients should reduce cash levels and put them in equities. Equities love an economic recovery.'

The recovery, Mr Gill says, is likely to be slow and fragile. But companies may well show stronger margins and earnings in the second half, as data indicates that new orders are exceeding inventory.

Mr Corry expects a range-bound market and tells clients to go for a 'best of breed' approach, as stock picking is expected to rise to the fore. 'There are attractive opportunities,' he says. 'Last year was a year for macro strategies. This year is for micro strategies. The good news last year was that it didn't matter if you bought good or bad stocks as there was no differentiation.

'This year, the good news is now that we've seen normalisation and lower VIX, we're starting to see inter-sector correlations decline and differentiation in stock performance. If you buy good stocks with good fundamentals, you should do pretty well.'

VIX measures market expectations of volatility based on the S&P 500.