Value investing back in vogue for 2012, says JP Morgan
JP Morgan Asset Management says it favours emerging market equities on expectations that inflation will be contained in combination with the prospect of monetary policy easing.
It is also recommending that investors diversify via multi-income strategies given the likelihood that the European sovereign debt crisis will remain a source of volatility.
After seeing over 5% of AUM flow out of emerging market equity funds last year, JP Morgan is betting that opportunities will emerge amid attractive valuations, with the trailing P/B ratio of the MSCI Asia ex-Japan index at 1.5x, below the average of 1.8x since mid-1990s, according to Goldman Sachs data.
Grace Tam, JP Morgan’s market strategist, believes buyers should go back to a value investment strategy this year. “In the second half of last year, value investment did not work, but in January we have seen value stocks outperforming growth stocks,” she notes.
Within an Asia-Pacific portfolio JP Morgan is overweighting Chinese equities, which are expected to benefit from monetary policy easing as the consumer price index has dropped from 6.5% last July to 4.1% in December.
Tam attributes last year’s underperformance of Chinese equities, especially in the first half, to inflation and fears of monetary tightening.
But she notes that currently the valuation levels for A-shares (CSI 300 Index P/E 9.2x, P/B 1.5x) and H-shares (MSCI China Index P/E 8.7x, P/B 1.4x) are both at historically low levels.
Among Chinese equities, JP Morgan favours high-beta stocks on the basis that they are better placed to benefit if increased liquidity drives a market rally.
However, Tam believes that monetary easing will only happen in selected areas, including public housing, existing infrastructure projects and small and medium-size enterprises, rather than actions such as the stimulus packages seen in 2008 and 2009.
Geoff Lewis, JP Morgan global strategist, argues that the credit/lending quota guidance for the year is a more important indication of monetary policy direction than the reserve requirement ratio (RRR). “The RRR cuts are just technical adjustments to offset money outflows,” he states.
With regards to the property sector, JP Morgan notes that the Chinese government is still holding its macro-control policy. “We actually think that over-tightening in the property market is the biggest risk, which would hurt consumption in first-tier cities,” says Tam.
Among other Asian markets, JP Morgan is overweighting India, Thailand and Indonesia and underweighting export-dependent economies such as Japan, Korea and Taiwan.
“India’s performance last year was really poor and has priced in most bad news,” says Tam. “The earnings revision has come to a more a realistic level and inflation has come down significantly, leaving room for the central bank to ease [monetary policy].”
Looking at the broad global economic backdrop, Lewis suggests that a “muddle-through” scenario is most likely for 2012, meaning low GDP growth of 0-3% and inflation below 2%, while the European debt crisis will continue to be the major source of volatility.
Accordingly it advises investors concerned about volatility to focus less on high-yielding, volatile stocks. “The ‘search for yield’ theme could be around for the next couple of years because we don’t think that the problems in Europe will be solved in a short time,” Tam adds.
Lewis explains that the multi-asset, multi-income theme is not just buying high dividend stocks with no growth prospects. “You don’t want to end up buying quite expensive utilities stocks,” he says. “What you should look for is a good yield plus growth prospects plus profits. So you do have to be stock selective.”
At the same time he also points to the benefits of diversification. “You should not be too aggressive in equity allocation; you should also look at corporate credit, high yield and emerging market debt.”
He notes that corporate credit is the firm's highest conviction of all for 2012. “In a low but relatively stable growth trend and low inflation, that’s traditionally when corporate credits have done well,” he points out.