Swiss private bank Clariden Leu expects to seek an entry point for Indian equities in the next six months as it anticipates a peak in the nation’s soaring inflation rate.
Soon Gek Chew, head of portfolio management and investment strategy for Asia, reaffirmed the bank’s conservative global positioning, saying it had cut its equities allocation for a balanced portfolio to 30%, from 42% at the start of this year, and raised cash to 18%, from 5%.
It comes after the firm moved to streamline its organisational structure following the recent resignation of chief investment officer and head of global investment solutions (and Chew’s former boss) Sandeep Malhotra, based in Zurich.
Clariden Leu, a Credit Suisse subsidiary formed in 2007 from the merger of five CS units, has appointed Marco Bartolucci as global head of its investment products division and chairman of its investment committee after Malhotra’s departure. The firm says it is bundling its activities and increasing operational efficiency and quality.
In a meeting with AsianInvestor last week, Chew outlined the private bank’s relative call on India, as well as Indonesia, and explained why global equity market volatility and lack of visibility means it now focuses on price-to-book ratios rather than price-to-earnings.
India’s wholesale price inflation hit a year-long high of 9.78% in August, the fastest rising among the emerging-market economies of Brazil, Russia, India and China.
It prompted the Reserve Bank of India to raise its repurchase rate for the 12th time in the past 18 months, and pressure remains on the central bank to tighten monetary policy at its next review meeting on October 25.
Chew describes India’s equity market as “very unloved”, with the Sensex30 Index having sunk 19.4% in the past year to October 4. She predicts that inflation in emerging markets will peak in the next six months, after which India’s equity market will start to look interesting on a relative basis.
“Clearly inflation has not peaked yet and it is not easy to bring down,” she says. “But if you look at where producer prices are going, they are probably heading south, so you can see inflation probably trending lower. We will look for an entry point.”
As another relative call, Clariden Leu recently exited Indonesian equities. It claims to have acted before the Jakarta Stock Exchange Composite Index slumped almost 9% on September 22.
“We saw the rupiah weakening significantly and that to us was a signal to take money off the table,” says Chew. “Within our balanced discretionary accounts, we have no more Indonesia equity positions.”
Amid global growth concerns and peripheral debt fears for Europe’s banking sector, Clariden Leu has cut its equities allocation: it is underweight Europe and the US, and neutral on Asia.
“Asia still has the growth, but amid global risk aversion money has also left emerging markets,” reflects Chew. “But when things settle down I think emerging markets still have better prospects than developed markets, so we have kept to that neutral weight in emerging markets, principally Asia.”
She notes that Asian equities are presently trading at around 1.5-times price-to-book value, but historically have dipped as low as 1.2 times over the past 15 years.
“So there is a risk that markets could still trade south,” she adds. “That is why, having raised cash levels, we would rather wait to see if data improves and to see some near-term resolution in the eurozone debt crisis before putting money back to work in equity markets.
“On a price-to-earnings level, markets look interesting, trading at nine or 10 times, but there’s a lot of uncertainty for future earnings, so we would revert to something like price-to-book to gauge entry levels.”
Clariden Leu has kept its fixed income allocation in a moderate risk Asian-biased portfolio at around 38%, half of it in investment grade Asian corporate bonds, as well as in some developed market high-yield debt.
Asked if she thought corporate bonds in Europe presented a buying proposition, she replies: “Our basic view is to avoid peripheral debt and financials. Corporate balance sheets are sound, so at best we would be in some of the non-financial corporate bonds.
“There are still systemic risks in Europe and we are not sure how things will pan out in Europe. Corporate spreads are still rising and the technicals are not very good for European bonds, so until that stabilises we would not want to think about accumulating European bonds.”
She agrees that Greece is vulnerable (and technically in default), with the market having already priced in a huge haircut on its debt. She wants to see the European Financial Stability Facility expanded to deal with potential contagion effects, and expects some recapitalisation of banks.
“The European Central Bank is already acting as a buyer of last resort. If you can ring-fence the peripheral economies and their bonds, and recapitalise the banks, then probably you have some kind of resolution. But overall, because there is a lack of visibility on solutions, we would not be buyers yet on [European] financial bonds.”
She says Clariden Leu’s clients are aware of the firm’s defensive asset allocation, noting that conversations frequently revolve around dividend yield stocks and high-quality corporate bonds that provide yield.
“Clients are more risk-aware now and they are looking to hedge their risk. They have just come out of a major financial crisis in 2008. They are open to opportunities, but they want to understand the investments and the risk they are taking on. I think most people will tell you that leverage at the client level is much lower than before.”
She describes equity valuations for Chinese companies as interesting – the firm manages H-shares in client discretionary portfolios, but will not comment on whether it has a QFII licence and how it might access the A-share market.
“On the debt side [for China], while we are not unduly concerned, we think there is a lot of room on the fiscal side for the government to spend, particularly in the area of middle-income housing.”