The full article appears in the November edition of AsianInvestor magazine. The following is an excerpt. To learn more about our premium content, please contact Stephen Tang on +852 2122 5239 or at [email protected]
Reporting from London for this year's annual global equity survey, AsianInvestor encountered a decidedly more secure financial backdrop. A year ago, interviews with asset management's leading CIOs and fund managers had spanned the collapse of Lehman Brothers, the largest single day slump in global equity markets since 9/11 and the $85 billion emergency bailout of US insurance giant AIG.
A year later, despite widespread bank nationalization in Britain and America, and the worst global recession in living memory, the portents are considerably more encouraging. After the FTSE fell close to 3,500 in early March it has rebounded over 40% to over 5,000 by late September as rallies in the once-stricken financial stocks have spread to other sectors. The MSCI World All Countries Index has shown a similar recovery, climbing nearly 30% from March lows.
For most commentators, this large stock market rebound is not yet mirrored by strong growth prospects for the world's economies. Projections for US growth through next year are guarded, and derive from the shift to consumer saving and growing fear of joblessness.
"In the Anglo-Saxon economies the consumer is responsible for over two thirds of demand," summarizes Jeff Munroe, CIO of Newton Investment Management. "He is now indebted and has suffered a fall in house prices: the recovery will be long and drawn out."
A second factor that will slow growth next year is widespread indebtedness on the part of governments.
In the United States, the emergency government stimulus package, only just passed by Congress when we went to press with last year's survey, has swelled existing borrowing to the tune of $11 trillion, a number projected to increase to $20 trillion over the next few years, despite the Obama administration's declaration that it will cut the deficit, according to Munroe. At a modest 3% average interest rate, this debt would require 30% of current US government spending just to service.
And yet fund managers remain somewhat optimistic that US stocks, at least, can provide some growth. The private sector is healing after widespread cost cutting, enabled by relatively flexible labour laws. The striking result has been that earnings have beaten expectations across 75% of all announcements this year, according to Kurt Umbarger, global equity portfolio specialist at T. Rowe Price.
This should not be mistaken for a repeat of the credit-fuelled boom that started the decade, however. Future growth in America, and the world, will have new engines. This is particularly true for banking stocks. Although plenty of fund managers currently favour this sector - particularly in Asia -- it is one that faces less demand for borrowing, and the prospect of greater capital requirements and limits on leverage. Bank stocks are likely to provide more measured dividends and a steadier return on capital.
Projections for continued growth in Asian stock markets are based on the belief of most respondents that economies there will be able to broaden their domestic infrastructure and develop their consumer bases, shifting from the saver- and export-driven model of the past.
These markets remain popular for managers, with China the favourite, as it delivers on the government's growth targets for 2009 through sustained stimulus and widespread infrastructure spending. Interestingly this consensus replaces a caution towards Asia expressed in last year's survey, as respondents feared the dependence of these economies on global liquidity and US consumer demand.
"The recession is a balance-sheet recession arising from economies being over-leveraged, not an earnings or monetary policy recession," explains Manraj Sekhon, head of international equities at Henderson Global Investors, voicing the consensus. "Those emerging economies -- especially in Asia -- with stronger balance sheets and less leverage have exited the recession first and will grow better on recovery."
For most respondents, therefore, relatively high valuations in Asia do not make the region's stock overvalued. Growth there will come about without the associated financial risks accompanying it elsewhere in the world.
Anything that can grow securely in this environment deserves to be highly valued, goes the argument, so across the region value premiums are not significantly higher than those in the West.
"Asia may not be as cheap as it was, but as the only region with reliable growth, people are prepared to pay for it," says James Ross, head of European value equities at Alliance Bernstein...
To see the full version of this article, check out the November edition of AsianInvestor magazine.