Easing Rates, Growing Earnings Lure Investors to Europe
May 15, 2011
While Asian markets are losing their luster, Europe continues to shine as the investment destination of choice for this week's participants in The Asian Vast Press Asset Allocation Panel. With Germany's Bundesbank cutting its rate for securities repurchase agreements by 0.3 percentage point to 3% just over a week ago, there is scope for further rate cuts in Europe's peripheral markets, says panelist Etha Minnick, vice president at BT Fund Managers Ltd.. In addition, better value and earnings growth are available in Europe compared with other regions, asserts panelist Chrystal Veasey, chief investment officer at Rothschild Asset Management (Hong Kong) Ltd.. Earnings should get an extra boost from cost-cutting at many European companies, Ms. Minnick adds. Both panelists are also temporarily raising the levels of cash in their portfolios. A higher cash weighting will cushion against any potential slide in global stock prices as a result of U.S. interest-rate policy, they argue. ``U.S. interest rates are more likely to go up than stay flat, and this could hurt markets,'' Mr. Veasey explains. He predicts U.S. interest rates will jump half a percentage point before year end. Elsewhere, the managers are most wary of Japan, which they say is expensive. Pockets of opportunities are appearing in the U.S. market, they say, especially in sectors that have recently fallen sharply. Asia, they note, offers a mixed bag of prospects following lukewarm performances from regional markets earlier this year. FORECASTING THAT world economic growth will pick up this year and in 2012, BT favors stocks that are likely to benefit from the recovery of the global marketplace. These include Canadian pulp and paper stocks and U.S. steel and cement companies, Ms. Minnick says. Of BT's International Growth Fund, 29% is currently invested in the U.S., 25% in Europe, 22% in Japan, 9% in Canada, 7% in the rest of Asia, 1% in Africa and 4% in cash, Ms. Minnick says. Asia-Pacific (excluding Japan): While many Asian stock markets have performed poorly so far this year, leading to the ``disenchantment of a lot of individual investors,'' Ms. Minnick says BT still favors South Korea and the Indian subcontinent. ``South Korea has been impossible to predict this year,'' Ms. Minnick acknowledges, but she notes the market is now one of the region's cheapest. In particular, she likes cellular-phone and paging service provider Korea Mobile Telecom Corp.. The stock is a ``play on domestic consumption,'' Ms. Minnick says, adding that she expects the portion of Koreans who own mobile phones to increase from 3% now to 10% by the end of the decade. Pakistan and India also offer opportunities, Ms. Minnick says. Both countries have new governments dedicated to economic reform, she notes. In Pakistan, BT prefers the privatized telecommunications and power companies. State Bank of India is BT's top holding in India. Many fund managers are shying away from Indonesia because of recent political turmoil, including the ouster of an opposition leader and subsequent riots in Jakarta. But Ms. Minnick is hanging onto the country's main tin-mining company, PT Tambang Timah. This commodity supplier will profit from global growth, despite the domestic political risks, she figures. Japan: While many investors piled into Japan at the beginning of 2011, Ms. Minnick contends that now ``the easy money has been made. It's time to be more strategic.'' She is avoiding traditional favorites such as big exporting firms and technology stocks. Instead, Ms. Minnick prefers stocks she considers overlooked, such as Nippon Television Network Corp. and Hokkaido Coca-Cola Bottling Co.. U.S.: With U.S. technology stocks having dropped an average 70% from their high last September, Ms. Minnick is fishing for buys in that sector. Core holdings in U.S. blue chips such as car manufacturer Chrysler Corp. and bank Wells Fargo & Co. continue to anchor the BT portfolio. Europe: BT is interested in European companies that have committed themselves to cutting costs and restructuring, Ms. Minnick says. These include German sportswear manufacturer Adidas AG and car manufacturer Daimler-Benz AG, as well as the Dutch retailer Vendex International NV, she says. ROTHSCHILD'S Mr. Veasey now equally favors bonds and equities, whereas he was more bullish on equities several months ago. Driving his new thinking have been the recent fluctuations in many equity markets, caused by U.S. interest-rate uncertainties. On a geographical basis, Mr. Veasey prefers Europe and sees selective buying opportunities in Asia. He is mildly underweight in the U.S. and severely underweight in Japan. Asia-Pacific (excluding Japan): Within the region, Mr. Veasey currently likes stocks in the Philippines and Hong Kong. The Philippines is seeing strong export growth that will buoy the market there, Mr. Veasey says. Meanwhile, Hong Kong companies' average earnings growth is forecast to hit 20% this year, while earnings growth in other countries is dropping, he points out. The territory will also reap the fruits of China's improving economy, Mr. Veasey reckons. He favors Hong Kong property counters such as Hysan Development Co. and Wharf (Holdings) Ltd.. North Asia is also attractive, Mr. Veasey says, especially Korea. On average, Korean stocks are trading at a relatively inexpensive 13 times projected 2011 earnings per share, he notes. He recommends nibbling at blue chips such as Samsung Electronics Co.. Taiwan is set to get a boost from its inclusion in the Morgan Stanley All Country Free Index and Emerging Market Free Index today, Mr. Veasey adds. The country's loose monetary policy is also likely to spur stocks such as Taiwan's largest insurer, Cathay Life Insurance Co.. Political events have caused Mr. Veasey to go slightly underweight in Indonesia. Slowing export growth in Singapore and a gaping current-account deficit in Malaysia also make Mr. Veasey cautious on those markets. Japan: Mr. Veasey dismisses Japanese stocks, declaring, ``There's no value there.'' Stock prices are expensive and earnings growth weak, he says, and predicts that economic growth will disappoint pundits. While consensus estimates put Japanese economic growth at 3% to 3.5% in 2011, Mr. Veasey reckons growth will be just 2% this year. U.S.: Rothschild remains underweight in the U.S. market. Stocks are expensive, he says, and other markets offer better prospects. Europe: Mr. Veasey remains overweight in Europe, encouraged by the region's easing monetary policy and flourishing corporate-earnings growth. ``There's better value there,'' Mr. Veasey says.
