Pictet Wealth Management
CIO Bhaskar Laxminarayan generally sees a difficult global investment environment in 2015 because cheap assets are hard to find.
He favours equities, which are expected to have 6% returns, “down from the historical double digit returns they enjoyed in the past decades, a factor combination of slower growth and richer valuations”.
“The returns from equities will still beat investment grade bonds, which are expected to return 2%. High yield assets could mirror equity-type returns, but risk profiling is better in equities space than in high yield.”
Private equity, he believes, is today’s most robust asset class.
“Quality entrepreneurs have been starved of capital from traditional capital markets in the past few years, an opportunity that private equity is capitalising on. We believe when you look back in a few years from now, the present vintage of private equity investments may well be one the best performing assets.”
China
The firm is warming to China equities due to reasonable valuations and an expected boost in the equity markets due to the Hong Kong-Shanghai Stock Connect, which launched earlier this month.
“There is a certain amount of credit excess in China, but this remains a manageable problem and is unlikely to be destabilising as things stand today. “
India
Laxminarayan is bullish on India, which he said has huge growth potential that is structural.
“If you are not in [India], buy it. There are many low hanging fruits in this Indian revival that we are seeing and hence momentum in this market is likely to stay. Execution risks do exist, but are not likely to be material for another year or two.”
ASEAN
Valuations remain too high in ASEAN countries, “particularly in the Philippines, and partly in Thailand and Indonesia”.
Asia dividend stocks
“High dividend is a theme to play in Asia as it fulfills both yield seekers and those wanting to invest in high quality equities at reasonable valuations. The same theme does not hold true in developed markets this year as the valuations are rich for high yielding equities.
“In Asia, we are still seeing growth and earnings upgrades in high dividend equities.”
Bonds
“We would stick with US dollar-denominated debt as local currencies is likely to feel the pressure of a strengthening dollar.
“Bond yields have been compressed. However, there is a sweet spot in the emerging market corporate bond market. The EM corporate bond market has become a significant asset class as it is as big as the US high yield market, and tradable as well as liquid.”
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Robeco Group
Arnout van Rijn, head of Robeco’s Asia Pacific team, has shifted gears on most Asian equities and he sees upside.
“After having been neutral for a long time, I am now bullish on Asia. The current low valuations mean that Asian stocks have bottomed out. I expect the Japanese and Chinese markets to rise in 2015 and to take the rest of the region’s markets with them.
“Asian equities, including Japan, are currently around 20% cheaper than those in the rest of the world.
“Corporate governance in Japan, China and South Korea, where the firm is overweight in Asia, is unsatisfactory, and that is a key factor in the low market valuations.
“But we are seeing positive changes in terms of shareholder friendliness. This started ten years ago in Japan, moved on into Korea and has now reached China. Companies are starting to listen to their shareholders. I expect higher future pay-outs to help bring the current low Asian valuations to an end.”
Japan
“In 2015, the Japanese will keep on printing money at a rapid rate. The experiment known as Abenomics has only just begun. The signs are hopeful. In the housing market, people are gradually starting to realize that prices can also rise. This is new.
It is important that Prime Minster Abe maintains this upbeat mood. Economic growth and inflation should give Japanese consumers the confidence to spend more. Higher margins and the cheaper yen should ensure that corporate earnings grow strongly. This is an important impetus for the stock market.”
“Japan is on a price-earnings ratio of 15 for this year and 13 for next year, but generates much more cash flow than earnings.”
Korea
“Korea is really cheap at the moment. In Korea you pay ten times earnings this year and nine times earnings for next year. The low valuation is partially due to the constant threat from the North.
“I think that domestic pension funds will put pressure on Korean companies to pay out more dividends and will thus ensure higher valuations.”
China
“With price-to-earnings around 9, Chinese stocks seem incredibly cheap. This is a somewhat distorted picture, because Chinese banks have an average valuation of only five or six times earnings. Investors are worried about the quantity of bad loans on bank balance sheets – and rightly so.”
Slowing GDP growth is good for equities because companies are pressured to improve earnings in order to stay competitive.
“The current high economic growth is leading to overproduction and lower margins. I prefer lower growth and higher margins.”
The bursting of the Chinese real estate bubble is also favourable for stocks.
“Instead of looking for a second apartment, people are seeking alternative investments. These could be stocks. The fact that Beijing is no longer allowing banks to issue their popular but shady wealth management products could also be positive for the Chinese markets.”
The Shanghai-Hong Kong Stock Connect, he said, creates a market that accounts for 30% of the Emerging Markets Index.
“This and the low valuations will attract extra investors.”
India
Van Rijn cited the election results in India that brought in the reform-minded government of Prime Minister Narendra Modi as a huge positive.
“If Prime Minister Modi manages to get a grip on inflation, and it looks as though he will, the cost of capital will fall and equity valuations can rise further. In that case we can move away from our neutral position and also overweight India.”
Indonesia
However, the firm was negative on Indonesia “An overweight in Indonesia is not on the cards. Inflation there is far from being under control. If US interest rates rise, the Indonesian market will be hit hard.”
Valuations are an issue as well.
“I can’t fathom the excessively high valuations of Indonesian stocks.”
