Showing posts with label 2012 market outlook. Show all posts
Showing posts with label 2012 market outlook. Show all posts

Tuesday 7 February 2012

Steps to recovery - 2012 market outlook

Steps to recovery
February 8, 2012


Bulls and bears ... choose wisely.
Bulls and bears ... choose wisely.
.
<i>Illustration: Karl Hilzinger</i>
Escape the bear … a semblance of reliability in certain stocks at least should become apparent this year. Illustration: Karl Hilzinger

Satyajit Das
Flow-on effects ... former banker and author Satyajit Das. Photo: Tomasz Machnik

After years of volatility, there are sure signs some stocks are worth investing in, writes John Collett.
It's not surprising that investors are confused - so are the experts. Many called the recovery in Australian shares at the start of last year, only to see markets dip lower. They're reluctant to call it again, even though there has been a good start to the year on world sharemarkets.
The woeful performance of most sharemarkets last year and the trials and tribulations of Europe's debt crisis suggest investors should stick with the capital security of cash.
On the other hand, Australia's economy is growing at close to its trend of a little more than 3 per cent. And economists expect that rate of growth to be maintained, even if there is a recession in Europe this year.

Forecasts of lower global growth by the World Bank and International Monetary Fund should not affect the outlook for Australia, according to most economists.
If anything, the risk is that we talk ourselves into lower growth by focusing too much on the negatives.
The outlook for the world overall is slower growth but not recession, though recession is expected in Europe.

Chinese authorities seem to be engineering a soft landing for the economy, which has slowed to just under 9 per cent, down from about 11 per cent.
Our big miners are certainly showing confidence in China by continuing to make big investments in new mines. And the economic data on the US suggests the country is not about to slip back into a ''double dip'' recession.
The big question for investors, though, is whether we have been through the worst of it.
Is it time to start moving out of cash and into shares? Term deposits have been a rock for worried investors for the past three years but cash is not a long-term solution for wealth accumulation. Interest rates are on their way down. After paying tax on the interest at the investor's marginal income tax rate, term deposits are only just beating inflation.
AUSTRALIAN SHARES
''The improved global economic outlook and reduced risks regarding Europe suggest 2012 should be a better year for shares and other risk assets,'' the chief economist at AMP Capital Investors, Shane Oliver, says. ''This is also supported by the fact that shares are starting the year on sharemarket valuations well below year-ago levels.
''Sharemarket price-to-earnings multiples remain low.''
It's been a good start to the year on world sharemarkets, as it was last year, before markets turned down once again. Australian share prices are almost 6 per cent higher since the start of this year.
US share prices are more than 4 per cent higher and even European shares are more than 5 per cent higher.
The Australian sharemarket underperformed other sharemarkets quite badly last year, with share prices down more than 14 per cent. But the fundamentals of our economy did not justify that, an analyst at Fat Prophets sharemarket research, Greg Fraser, says.
Australian shares could end this year between 15 per cent and 20 per cent higher than they started the year, he says. Fraser favours the diversified miners such as BHP Billiton and Rio Tinto and gold miner Newcrest Mining.
In the energy sector, he likes Woodside Petroleum. Among the industrials, he likes packaging company Amcor, which bought the Alcan packaging assets cheaply.
DEFENSIVE STANCE
The editor of FNArena financial news and analysis service, Rudi Filapek-Vandyck, says long-term investors should continue to have a ''big chunk'' of defensive stocks in their portfolios. But he can see the logic of taking a bit more risk in portfolios as sentiment could turn positive very quickly.
One of the problems for investors is that many of the defensive stocks are, if not overvalued, fully valued. ''People who want to add to the defensive part of their portfolios have to be careful not to pay too much,'' he says. Among the defensive stocks, he likes Blackmores. The food supplements and vitamins maker is a ''dream stock'' to have in a portfolio but is normally too expensive.
''Its share price has come down over the past month, as the market has been selling out of stocks like Blackmores and buying miners and biotechs,'' Filapek-Vandyck says. He also likes Fleetwood Corporation. Its original business is making caravans but it also builds and operates mobile accommodation for the mining industry. Its shares are on a fully franked dividend yield of 7 per cent.
For investors with an appetite for risk, he likes iron-ore miner Fortescue Metals Group. ''If sentiment turns positive and world growth this year, including China, surprises on the upside, then Fortescue is definitely among the stocks you want to have.''
For those who can take on more risks, substantial rewards could be on offer from international shares.
INTERNATIONAL SHARES
The US is still home to many of the most profitable companies in the world.
''Corporate balance sheets are arguably in the best shape we have ever seen, with very low levels of debt and mountains of cash,'' says Jonathan Pain, a former fund manager and author of the investment newsletter The Pain Report.
He says in his latest report: ''Apple has $US97.6 billion of cash, enough to cover Greece's debt payments due in the next two years.'' During 2011, Apple's sales rose to $US127.8 billion, ''bigger than the size of the New Zealand economy'', while more iPhones were sold each day in the final three months of last year than babies were born in the world, according to data compiled by Bloomberg and the United Nations.
Greg Fraser says of the overseas sharemarkets, the US could do best given the emerging economic recovery there.
Fraser regards European shares as a ''no-go zone'', as there are just too many unknowns. Pain says the world's most populous nations will continue to produce the lion's share of global growth.
He regards Indonesia, the world's fourth-most populous nation, as ''one of the most exciting prospects on planet Earth''. India should grow about 7 per cent and China should should slow to about 7 per cent, Pain says. Japan will ''bumble more than muddle along'', he says. ''Their demographics are truly horrifying, as soon more adult diapers will be sold than those for children.''
For most investors, the best way to own shares listed on overseas sharemarkets is to invest through a fund manager. Andrew Clifford, the deputy chief investment officer at fund manager Platinum Asset Management, says the manager owns many strong and growing businesses trading at attractive prices.
BMW, Microsoft, Samsung Electronics, China Mobile and Royal Dutch Shell are trading on low price-to-earnings multiples of between eight and 11 times. ''Each of these businesses will face challenges in the current economic environment but our assessment is that they are well-placed to grow their businesses over the next five years or so,'' Clifford says.
The fund manager also has investments in companies on ''distressed'' valuations such as Bank of America and Allianz Insurance. ''On any given company, we will clearly make errors but with a portfolio of companies on starting valuations such as these, it is difficult to see how they will not provide investors with good returns over the next three to five years,'' Clifford says.
WHAT TO DO?
Investors have to think about capital preservation first, then income and, last, about the opportunities for capital gains, says Satyajit Das, a former banker and author of Extreme Money: The Masters of the Universe and the Cult of Risk. It is the reserve order of how investors have thought about investing for the past 20 years.
In Das's opinion, there is almost a bubble in high-dividend stocks and a bubble in high-yield corporate debt, including non-investment grade debt.
''You want a core portfolio that is throwing off income and is capital-secure but you want to capture some growth,'' he says. Investors need to be mindful of the elevated risks - there will be bubbles and busts and the recovery could be a very long one.
''People forget it took 25 years for US stocks to recover to the level of 1929,'' Das says. ''People also forget that even if Australian share prices rose by 10 per cent, prices would still be 30 per cent below their high.''
Pain continues to favour global companies, regardless of their domicile, that have the reach and scale to benefit from the emergence of the Asian middle class.
He also favours a core exposure to energy-related assets and an exposure to gold, as it should provide some security against some of the more nasty risks. The chief geo-political risk, as Pain sees it, is conflict in the Persian Gulf over Iran's nuclear ambitions.
Three reasons to be cautious
Satyajit Das says there are still significant risks for investors: ''Europe is going to be trapped in, at best, a long period of low growth and at worst, a deep recession.''
He identifies at least three channels of possible contagion of the ''train wreck'' in Europe to Australia.
Slowing European demand for Chinese exports and imbalances in the Chinese economy could lead to China's growth rates falling from less than 9 per cent now to between 5 per cent and 7 per cent - and it could happen quite quickly, Das says.
And, with all the new mines opening there could be an oversupply of some commodities at the same time as demand weakens.
That would have a big impact on the profitability of Australian mining companies.
There is another way the woes in Europe could affect Australia. Its current account deficit has to be funded from overseas markets, including Europe. Das says Australian banks might have to start rationing credit if their costs of borrowing from overseas increase.
He says a third danger is the emerging ''currency wars''. Europe, the US and Japan are trying to devalue their currencies to increase the competitiveness of their exports.
The problem with that is the Australian dollar could be pushed higher, reducing Australia's competitiveness with exports.


Read more: http://www.smh.com.au/money/investing/steps-to-recovery-20120207-1r2ah.html#ixzz1lgc4hMVr

Friday 6 January 2012

Equity Market Review 2011: Only 3 Countries Survived The Drop!

January 5, 2012
2011 has been an extremely turbulent ride for investors as global markets; equity, fixed income and commodities, endured what can only be described at the very least as a volatile year.

Author : iFAST Research Team


2011 has been an extremely turbulent ride for investors as global markets; equity, fixed income and commodities, endured what can only be described at the very least as a volatile year.

1H 2011 got off to a good start for investors as most equity markets extended 2010’s spectacular year-end rally. However, the markets encountered severe turbulence as natural disasters afflicted Australia (floods and a hurricane) and Japan (earthquake and resulting tsunami) while the Middle East and North Africa (MENA) region witnessed mass uprisings and the dethroning of several hardmen such as Hosni Mubarak while commodities suffered a flash crash, led by silver which fell -28.4% in a week in early May, following the raising of margins by the Chicago Mercantile Exchange. In the emerging markets, many of the central banks tightened monetary policy by raising interest rates, hiking bank reserve requirement ratios, allowing their currency to appreciate against the developed nation's currencies (chiefly the USD and the EUR) as they kept a keen eye on inflation. Of interest in 1H 2011, was the withdrawal of monies from the emerging markets which measured USD 8.9 billion on a year-to-date basis as of 22 June 2011.

2H 2011 provided investors with no respite and even ratcheted up the ante on global investors. The European sovereign debt crisis decided to reignite itself as the crisis spread from Greece to the more crucial nations of Spain and Italy, with even France nearly finding itself in the crosshairs of global markets. Fixed income markets went frenetic and equity markets started to bleed, with wild intraday swings of as much as 8%, resulting in investors pulling their money out of capital markets in an attempt to protect their capital.

Across the Atlantic, America was not able to sit back and watch the serial drama unfolding in Europe. The downgrade of the US sovereign rating in August by Standard & Poor’s by a single notch saw the world’s largest debtor lose its AAA-rating, spooking markets and heightening risk aversion. The political bickering and eleventh-hour passage of the raise of the deficit ceiling had contributed its fair share to market volatility prior to the downgrade although the end result was never in doubt. Despite the downgrade in the rating of the US, US treasuries have been the best performing bond sector in spite of the words of many doomsayers.

As summer came and went, so did the heat investors were facing the tricky months of July – August. 4Q 2011 has, thankfully, brought some respite for investors. US economic data has started to provide positive surprises and lent markets some much needed optimism, as their European counterparts were busying themselves buying time with various measures to afford fiscal integration which would not happen overnight.

With the global cooperation by several major international central banks to provide unlimited USD liquidity to the financial system, particularly targeted at Europe, the credit crunch in Europe has been given a dosage of medicine to alleviate the symptoms of its illness. On a more significant note, the European central bank’s rate cut to bring the refinancing rate back to 1% (as it was at the beginning of 2011), and more specifically; the introduction of unlimited 3 year loan program has been a success in terms of banks taking approximately EUR 490 billion in loans. The funding program should aid the finances of banks; ease the credit crunch and liquidity crisis in the financial sector.

As we close the chapter on 2011 and turn the page to 2012, let us take a closer look at the key factors that have provided the support or pressure that has attributed to the performances of the top three (Indonesia, US and Malaysia) and bottom two (Brazil and India) performing markets.


Table 1: Market Performance (In RM Terms)
Market
Index
2011 Returns
Indonesia
JCI
4.2%
US
S&P 500
3.5%
Malaysia
KLCI
0.8%
Thailand
SET
-2.5%
World
MSCI World
-6.3%
Japan
Nikkei 225
-9.7%
Korea
KOSPI
-10.2%
Europe
Stoxx 600
-11.0%
Australia
S&P / ASX 200
-11.3%
Singapore
FTSE STI
-15.0%
Asia Ex-Japan
MSCI Asia Ex-Japan
-16.3%
China
HSML 100
-16.4%
Hong Kong
HSI
-17.1%
Emerging Markets
MSCI Emerging Markets
-17.6%
Russia
RTSI$
-19.7%
Taiwan
TWSE
-21.5%
Brazil
Bovespa
-24.7%
India
BSE SENSEX
-34.4%
Source: Bloomberg, iFAST compilations (As of end December 2011)
TOP PERFORMING MARKETS


Indonesia (+4.2% In RM terms)

Indonesia’s Jakarta Composite Index (JCI) index was left relatively unscathed in 2011, rising marginally by 4.2% (in RM terms) despite global equity markets suffering major setbacks in varying degrees. The JCI managed to reach its highest point of 4,193 in early August, a rise of 13.2% since the start of 2011 right before the deterioration of the global economic outlook and unresolved European sovereign debt crisis roiled the market. On 21 September alone, the Indonesian market dramatically dropped by 8.9%, the largest single day drop in 2011. Subsequently, JCI rebounded quickly and moved steadily in upward trend to close at 3,815 points to mark the end of 2011.

On the economic front, Indonesia has been seen as a resilient economy where domestic consumption contributes approximately 62% of the economic output. According to Bank Indonesia, Indonesia is expected to achieve 6.5% GDP growth in 2011 and 6.3% in 2012 on a year-on-year basis. Inflationary pressures have eased to 3.8% in December, the lowest since April 2010 while the reference interest rate was kept at record low of 6%. We believe Bank Indonesia has sufficient room to accommodate economic growth given high rates of inflation is no longer an imminent threat.

The decision of Fitch Ratings to upgrade Indonesia sovereign ratings from BB+ (non-investment grade) to BBB- (investment grade) was attributed to the improved economic performance, better fiscal position and strengthened economic fundamentals of the nation. Both the Indonesia GDP deficit and gross government debt to GDP are expected to remain low at levels of -0.6% and 25.2% respectively in 2011 as compared to -0.6% and 27.3% in 2010. Based on our estimates, JCI is trading at a forward PE of 13.7X and 12X for 2012 and 2013 respectively. However, due to limited upside potential by end 2013 as compared to other markets, we maintain Our “Neutral” rating of 2.5 stars for Indonesia.

US (+3.5% In RM Terms)
The US market (as represented by the S&P 500) managed to end 2011 at almost the same level as it started the year – 1257.60 on 30 December 2011, compared with 1257.64 on 31 December 2010. Nevertheless, this was enough to make the US equity market the second-best performing equity market under our coverage with the market delivering a 3.5% return in RM terms, even as global equity markets were roiled by Eurozone debt crisis concerns. The US economy started the year on a relatively bright note, with growth expectations for 2011 rising to as high as 3.2% in February 2011. However, a potent combination of soaring energy and commodity prices crimped consumer spending, the largest segment of the US economy. Following just a 0.4% growth rate (on a quarter-on-quarter annualised basis) in 1Q 11, commodity prices eased, and growth recovered to 1.3% and 1.8% (annualised quarter-on-quarter) in 2Q 11 and 3Q 11, with the economy now forecasted to post 1.8% full-year growth in 2011.

High unemployment and a weak housing market have continually been cited as issues weighing on the economy, but there has been much more cause for optimism as data improves on both fronts. Initial jobless claims have declined to non-recessionary levels, while payrolls data indicates that jobs have continued to be created, despite ongoing global economic uncertainty. Conditions also appear ripe for a housing market rebound, given that affordability is extremely high while current depressed new housing activity is (in our estimates) insufficient to cope with normalised demand due to population growth. With commodity prices having eased off their 2011 highs, we think the US economy may surprise on the upside in 2012, which has positive implications for corporate earnings and the stock market.

As of 30 December 2011, US earnings are expected to post 15.8% growth from 2010, a figure which appears easily achievable given that only 4Q 11 earnings have yet to be reported. With the market unchanged since the end of 2010, the strong growth in earnings has correspondingly made the US equity market cheaper, driving valuations down from 14.7X at the end of 2010 to 12.7X as of 30 December 2011. Consensus expectations are for further growth of 13.7% and 10.4% in 2012 and 2013, which will drive down valuations further. We expect the US equity market to re-rate to a significantly higher multiple of earnings which will provide considerable upside, and retain a 4.0 star “very attractive” rating on the US equity market.

Malaysia (+0.8% In RM Terms)
The Malaysia equity market gained 0.8% (in RM terms) in 2011, sending Malaysia to rank third on our top performing market list once more from 2010. The rise in the FBM KLCI was mainly supported by the telecommunication and oil & gas sectors, while the banking sector was the laggard of the year with most of the banking stocks in FBM KLCI reported a double-digit loss in 2011.

Our outlook for 2012 suggests that Malaysia economic growth will slow down but remain resilient, despite weaker external economic conditions that could dampen the exports demand. Domestic factors such as private consumption and private investment are expected to be the main drivers for the Malaysia economic growth. We estimate the Malaysia economy to grow by 4.0% - 4.5% in 2012.

Going forward, monetary policy is expected to switch from tightening to easing in view of lower inflationary pressure in 2012 as inflation is likely to have peaked in 2011. This provides ample headroom for policy easing to sustain economic growth. In our view, if the economic conditions deteriorate further, Bank Negara Malaysia is likely to cut the Overnight Policy Rate by 25 – 50 basis points in 2012.

The resiliency of the Malaysia equity market during the recent market crash and its moderate earnings growth prospects (to grow at 8.3% and 13.0% in 2012 and 2013) make it looks less undervalued and less attractive when compared with North Asian countries such as China, Hong Kong, Taiwan and South Korea. As indicated by the valuations, the 2012 and 2013 estimated PE for FBM KLCI stood at 15.1X and 13.4X respectively (as at 30 December 2011), which are just marginally lower than its historical fair PE of 16X. We estimate its upside potential by end-2013 to be around 19.5%, which could be decent returns for investors although it is not as exciting as those in North Asia. Overall, we maintain a 3.0 stars “Attractive” rating for Malaysia equity market.

BOTTOM PERFORMING MARKETS
India (-34.4% In RM Terms)
The Indian equity market (Sensex Index) was down by 34.4% in RM terms and by 24.6% in local currency (INR) for 2011. This poor performance has witnessed the market take the worst performing spot amongst the markets under our coverage as the country has underperformed against all major emerging equity markets and most of the developed economies as well. The underperformance by the Indian equity market is mainly due to macroeconomic factors such as a stubborn high inflation and it’s after effects and the crisis in developed economies specifically European countries.

The economy which was growing over 8% year-on-year (it was also the second fastest growing economy in the world) felt the heat of 13 continuous rate hikes since March 2010, an anti-inflationary stance by the central bank, has negatively impacted corporate profitability and has also severely slowed down corporate investment due to the high borrowing costs in 2011. The economy is expected to close the financial year with a growth rate of close to 7% as compared to the optimistic 9% projected by the government at the beginning of the year.

The growing concern over the debt crisis in European economies and a soft patch in the US has prompted foreign investors to exit the riskier markets such as the emerging markets. Foreign institutional investors have sold USD 357.5 million worth of equities in 2011 as opposed to a whopping USD 29.4 billion investment inflow in 2010. The fiscal deficit of India has also grown significantly following the 2008 economic crisis due to the stimulus package offered by government to revive the economy. The high fiscal deficit, high inflation and sell off by foreign institutional investors have put immense pressure on India’s national currency (Indian Rupee, INR) which has depreciated by almost 18% against the USD in 2011, leading the INR to be the worst performing currency amongst the emerging economies currencies. The depreciation of the INR against all major currencies has aggravated the underperformance of Indian equity market.

As per our in-house estimate, the Indian equity market is currently valued at a PE of 13.3X and 11.5X for 2011-12 and 2012-13 (as of 31 December 2011), with potential upside of 49%. Hence, we maintain a “Very Attractive” rating of 4.0 stars for the Indian market. With the prospect of inflation further softening following significant easing in the last 2 months, room for the central bank to look for growth by easing monetary policy is now available. Investors can consider entering into the Indian equity market with a long term perspective.

Brazil (-24.7% In RM Terms)
The Brazilian equity market, represented by the Bovespa index fell 24.7% in RM terms (18.1% in local currency terms) in 2011. Brazil has seen its stock market suffer on the back of a challenging external global environment due primarily to growth concerns in the US and the continuing sovereign debt crisis in continental Europe. With risk aversion plaguing global markets, investors have been quick to pull money out of the emerging markets, which are funnily enough deemed to be “riskier” than their counterparts in the developed markets from whom many of the current problems stem from, as they sought refuge in assets such as US Treasuries and Dollar denominated assets. The massive outflow of capital from Brazil has seen its currency depreciate by 17.75% against the USD by end 2011, a stark difference from a 7.3% appreciation against the USD in the first 7 months of the year. This massive outflow has in part caused the Bovespa index to at one point fall by as much as 30% on a year-to-date basis before staging a mini-comeback which saw the index rally 17.6% from its lows.

The Central bank’s reversal of a series of rate hikes earlier in the year has seen it cut its benchmark Selic rate by 1.5% since August 2011 as it seeks to prioritise growth over price control despite inflation above its stated target of 4.5% (plus/minus 2%). The government has begun to roll-back some of the inflation targeting measures introduced earlier in the year as it attempts to keep the nation’s economy from stalling. Latin America’s largest economy has seen its industrial production contract for almost the entire 2H 2011 (except for the month of July) as a result of the on-going problems and worries in the developed countries. Despite the contraction in industrial production, Brazil’s domestic consumption story remains compelling with retail sales, unemployment as well as wage growth pointing to continued resilience in domestic consumption.

With 59% of the Bovespa index comprising of companies related to the energy, industrial and material sectors, the index has suffered as the prices of most commodities fell in 2011 as industrial output across the world softened, particularly in the latter half of the year. Going into 2012, the Bovespa currently trades at a PE ratio of 9.0X and 7.8X (as of 31 December 2011) for 2012 and 2013 respectively, representing a discount of 47% from our fair value estimate of 11.5X earnings. We maintain our 4.5 Star “Very Attractive” rating on the Brazilian equity market as the domestic consumption factor as well as commodity producer status of Brazil remain the key drivers of a positive long-term investment opportunity.

A NEW YEAR GIVES RENEWED HOPE
In 2011, our picks for favourite regional market (Global Emerging Markets) and favourite single country (Taiwan) failed to shine due to bouts of risk aversion as a result of the roller-coaster developments in the developed markets.

The best performing single-country market, Indonesia, has again gazumped our best intentions and outperformed despite it being our least favourite market. Our favourite single-country market, Taiwan, has failed to shine as its export dependent economy has been affected by both poor sentiment as well as a treacherous global environment. Meanwhile, our favourite regional market, Global Emerging Markets (GEMS) suffered as international investors pulled money from these fast growing economies as they feared the repercussions of the West’s problems.

As we enter into 2012, we continue to favour equities over bonds due to the immense value to be found in most equity markets as well as the low yields currently on offer by fixed income.Our Key Investment Themes and 2012 Outlook identifies both the areas of opportunities as well as the potential risks we believe investors can expect to encounter in the coming year. Here’s wish one and all a profitable investment year with less stress in 2012!


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