Dynamic indexing suggests reducing Asia exposure
Asia may have stronger fundamentals and a more bullish economic outlook than Western countries, but investors have been jittery about the region's markets in recent weeks. And cold, hard and sophisticated calculations seem to bear out these concerns.
Zurich-based Wegelin Asset Management runs a dynamic, active indexing strategy that is heavily research-driven and does not tend to make short-term tactical changes to its allocation. However, says Asia-Pacific head Robert Huber, the strategy has reduced exposure to Asia in recent months.
"When we started the year, we were quite heavily invested in some Asian markets -- for example, Hong Kong and Singapore -- and they showed good momentum," he says. "They tend to be rather high beta, so we had some good exposure to them through 2009. We currently see stronger momentum elsewhere."
So how about the coming months? "We're at a fork in the road," says Zurich-based Huber. "Global markets remain volatile and investor sentiment still appears in our view to be running ahead of fundamentals."
"European equity market valuations still look very attractive relative to the rest of the globe," he adds. "If you look at the indebtedness of certain countries globally, you could bunch some parts of the Mediterranean together with some parts of the US. For example, California and Illinois are struggling to raise money in the capital markets, and comparisons could be made to the debt situation of Greece."
Moreover, the link between the macro economy and stock markets globally is not as strong as many people would perceive it to be, says Huber. For instance, he says, "the causality between a country having a strong macro economy and that country's stock market is not statistically significant".
Wegelin AM believes there's a momentum and mean-reversion effect within investments, which are played out in the medium to longer term, and that valuation is playing a significant role within potential returns, says Huber.
"In fact, academics and practitioners alike agree that it is a statistical fact that countries over sectors, over industries, over stocks are more provably mean-reverting," he adds. "That's why we focus on the country and global sector level."
Huber points to the fair-value analysis that Wegelin AM, which is part of private bank Wegelin & Co, conducts on different countries. The research suggests that most markets -- including Hong Kong and Singapore -- are undervalued relative to fair value as at June 30, with Australia and the US among the few that the firm's analysis suggests are overvalued.