SINCE March 9, there has been an impressive rally in the equities market with Asian bourses predominantly outperforming global equities. Equities have rallied as much as 43% – as measured by the MSCI World as at June 4 – from the market trough in March, on the back of worsening economic data, as many countries hit their worst ever GDP contraction in decades. This raises the question of whether the rally is justified and can continue, and whether it is too late for investors to jump on the bandwagon.

CIMB Private Banking is of the view that it is still not too late for investors to participate in this rally, although the magnitude of the rally is rather sharp, spanning over a period of three months. We believe that the rally can be sustained due to the following reasons:

The global economy (led by the United States) is very likely to have hit a bottom given a reduced contraction in the US 1Q09 GDP growth.

Fundamental indicators, namely the OECD Composite Leading Index (CLI), Global Purchasing Manager Index (PMI) and US manufacturing orders are all pointing to a bottoming in the global economy.




Excess liquidity in the financial system as a result of quantitative easing should drive risky asset prices (such as equities) up while institutional and retail investors are still under-invested in equities at the current juncture.

On a rolling 12-month consensus forward PER valuation basis, equity markets are inexpensive at current levels as corporate earnings should recover and lower their valuations (see table).

Investment strategies

1. Investors should pace their investment in equities

Technical price charts suggest that in the short term, equities markets are headed for some corrections as major markets are technically overbought temporarily. Nevertheless, we view any market consolidation as an opportunity to buy into equities.

The strategy, therefore, is to pace your equities investments along with possible corrections, and look to overweight equities and underweight fixed income. For Malaysia , our top sector picks are construction, plantation, gaming, and oil and gas.

2. Don’t overlook China and Asian equities

China is likely to continue to lead the pack and Asian equities are set to outperform the developed world. As such, we continue to favour China for its macroeconomic factors and are of the view that Chinese equities will continue to lead the region in earnings growth and market liquidity.

China’s strong fiscal-driven growth and rapid expansion of bank credit have resulted in five consecutive months of increase in Purchasing Managers’ Index (PMI), an indicator of economic health in the manufacturing sector. With the country’s low level of government debt, high household and corporate savings and the government’s willingness to adopt aggressive stimulus policy, China is able to boost domestic demand growth, even when exports are faltering.

All these are supportive of China ’s outperformance relative to regional markets. On the whole, we expect Asian equities to outperform the developed world on account of stronger economic growth rates and healthier financial position. As such, we prefer Asian equities to equities from the developed world.

3. Diversify portfolio via superior actively managed funds

Besides stocks, investors should consider getting exposure in equities through long-term proven and actively managed equity funds for superior outperformance to market indices and for diversification purposes.



For example, the Allianz Asia Pacific Oriental Income Fund, which invests in Asia Pacific, generated 27% excess return versus the MSCI Asia Pacific (including Japan) index in the last five years to earn a total return of 56%. We recommend a combination of Malaysian, Asian and Chinese equity funds.

Managing portfolio risks

The current financial and market crisis clearly points out the importance of managing risk of losses in a portfolio, particularly equity losses. Although optimism is emerging on recovery of the global economy, there is still much uncertainty on the longer-term repercussions of rising government debt, a low interest rate environment and quantitative easing.

In addition, there is also a risk of equity returns being front-loaded into 2009, making 2010 a challenging year for equities. One of the ways to help reduce the risk of equity losses is to diversify one’s portfolio into uncorrelated investments. Not only would this move reduce the impact of a fall of equity prices in a portfolio but it could also improve the portfolio’s return in the long run. The strategy to realise this is as follows:

1. Adopt fixed income papers

Fixed income remains a valued investment to anchor returns in a portfolio. While inflation is expected to rise in the long term, fixed income can generate real rate of return and cope with inflation risk by adopting a bond laddering investment approach. We advocate buying strong credits with high yield enhancements over fixed deposit returns, with staggered maturities.

2. Invest in uncorrelated assets to lower equity risks

One of the key lessons learnt from the crisis is to diversify one’s portfolio into uncorrelated investments. Not only can they reduce the impact from a fall in equity prices to a portfolio but they could also improve returns of the portfolio in the long run.

While fixed income is one such investment, we also recommend gold and managed futures as additional sources of uncorrelated returns. Besides being uncorrelated to equities and bonds, gold has proven to be a very effective hedge against a weak US dollar and rising inflation.

3. Managed futures is another avenue to effectively help hedge off some equity risks from a portfolio.

The investment strategy involves investing in futures, forward and option contracts through technical trading strategies, typically trend following. It is capable of generating returns from rising and falling markets due to its ability to long and short markets through futures contracts.

As a result, managed futures exhibits both uncorrelated returns to equities and bonds and absolute return characteristic in various market environments. Our research shows that substituting some equities exposure with managed futures significantly reduces the impact of falling stock prices in a traditional portfolio.

Source from thestar.com.my