Franklin Templeton doubts Greece aid package will help global equities

Global equities investor Alan Chua argues that value investing may be a good way of protecting against the ongoing risk of contagion stemming from sovereign debt in Europe.

Asian stock markets have recorded a relatively minor bounce following the announcement of the European €750 billion bailout package, as the region's investors realise the package just "moves debt around", says Alan Chua, portfolio manager for global equity management at Franklin Templeton in Singapore.

He echoes the view of many in the market by saying the package does not address the root cause of the problem. "Guaranteeing a bailout package for weaker countries simply means increasing debt in other countries," says Chua, and does not deal with the problem of profligacy.

"There will have to be a clamp down [on fiscal deficits] at some point and that will cause a lot of pain," he adds. "Until you get a proper resolution, a sustained rally is unlikely."

The deal boosted European markets earlier this week. The pan-European FTSE300 index jumped 7.4% on Monday, while Greek, Portuguese and Spanish markets enjoyed even bigger rises. Chua says the jump was expected, although he admits the magnitude was surprising.

Moreover, upside remains, but he is sceptical about the notion of rushing into false bargains. "Markets have been falling year-to-date, so the bounce was not surprising," he says. "But even given the size [of the increase], markets are still significantly off their highs."

However, the fact that currencies, particularly the euro, did not enjoy much of a gain this week suggests that investors continue to focus on the threat of contagion, something that also appeared to be reflected in the subsequent retreat in stock markets on Tuesday.

Others are also clear that more needs to be done. The coordinated action by the IMF and eurozone countries is good news, says Aberdeen Asset Management in a viewpoint note. "However, no one should be fooled into thinking it is the answer to the eurozone's fundamental woes, despite the positive response from investors," says the firm, adding that it does not address the issue of sustainability of public finances, given the level of budget deficits.

What, then, would Chua advise investors? "We advocate continued exposure to value," he says. "It has proven itself in the long run, although maybe not so much in the past year or so."

By buying cheaper stocks, investors remove a lot of downside risk, he says. As the markets have got cheaper, one should increase exposure to equities.

Chua also argues that equities are "a lot cheaper" than government bonds at present and that since interest rates can only go up from here, government bonds are "highly unlikely to outperform over the medium term".

In terms of specific sectors -- Chua focuses on sectors worldwide, rather than on country-specific investments, as is Franklin Templeton's traditional approach -- he favours pharmaceuticals, telecoms, IT and consumer discretionary stocks, such as auto, retail and media companies.

"We're heavily overweight pharmaceuticals, which have been de-rating over the past five years," he says. "They used to trade around 30 times P/E [price-to-earnings] ratios five or six years ago, but are now down to single-digit P/Es."

Telecoms stocks are now also in the single-digit P/Es, down from 20x at the height of the dotcom bubble. IT sector shares have also de-rated since the dotcom boom, and there has been massive underinvestment in the sector since then. "We're ripe for a cyclical bounce in IT investment at some point," says Chua.

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