Published February 20, 2010
WEALTH INSIGHTS
What to expect in this Tiger year
There is scope for renewed volatility as the global economy transitions from recovery to an uncertain longer-term trend
NOT surprisingly, Asia's strong share market rebound from the global financial crisis and robust economic performance is attracting a lot of investor interest. Ask any investor where the best returns will be over the next few years and the answer is likely to be emerging markets, and in particular Asia. With the developed economies facing an extended period of lacklustre growth amid deleveraging and balance sheet repair, Asia could easily develop into the 'next big thing' on the investment horizon.
REVALUATION
Yen depreciation seems to be the only policy option left in Japan given the re-emergence of persistent deflation and the faltering economic recovery
Two factors stand out as favourable for Asian markets in 2010. The first is that sharemarket valuations are not overly stretched. Asia is not cheap, but metrics such as price-to-book value and price-to-earnings are not yet pricing in an excessively optimistic outlook for corporate profit growth. The second is that monetary policy across the region is likely to remain extremely accommodative as central banks maintain US dollar currency pegs. Central banks can either control their currency or their domestic monetary policy. By pegging to the US dollar, Asia's central banks are effectively importing the ultra-easy monetary policy settings of the Fed. As a result, money and credit growth are likely to accelerate across the region. This will most likely find its way into asset price inflation before showing up later in the year as higher consumer price inflation.
Yet Asia is not without risks. There is still a question as to whether the region can maintain robust economic growth in the absence of strong export demand from the developed economies. The region could also suffer a hiccup if inflation pressures and the potential for over-heated property markets prompt a strong policy response.
It's hard not to be impressed by the longer-term growth potential of the region, especially compared to diminished prospects for the developed economies. Investors need to remember the region's potential for volatility, but Asia stands out as one of the bright spots on the investment horizon.
We do not expect a significant US dollar rebound during 2010. 'Low for long' Fed rates, deleveraging and an economy that needs to transition from consumption to more export dependence, all argue for an extended period of US dollar undervaluation. However, it seems that the pessimism about the greenback is overdone. For a start, the US dollar is already extremely weak. The Fed's real trade-weighted broad US dollar index has fallen 12 per cent since March, and 24 per cent since the 2002 peak. It is now near the previous lows of the past 35 years.
It's worth remembering that currencies are relative. For the greenback to sink lower, other currencies have to appreciate. The poor state of the European and UK economies make it hard to argue for euro or sterling strength; the euro is already close to the 2008 peak. Yen depreciation seems the only policy option left in Japan given the re-emergence of persistent deflation and the faltering economic recovery. China seems unlikely to abandon its de-facto dollar peg anytime soon, and with domestic inflation still negative, is under no pressure to revalue. This means that the People's Bank of China will continue to be the US dollar buyer of last resort.
The US dollar could even be one of the better performing currencies next year if the US continues its gradual economic recovery, firming expectations for an early 2011 start to Fed interest rate normalisation. So although it's hard to make a strong case for the greenback, it may win the 'least-ugly' competition and confound those predicting the end of the dollar-era.
Without question, 2009 tested resolve and discipline as investors weighed the probability of financial market collapse against the prospects of a global recovery. But while it was difficult to stay disciplined in the depths of pessimism during March, there were distinct opportunities and forecasts that saw a patient and disciplined perspective rewarded. The narrowing of credit spreads, the performance of investment grade debt relative to treasuries and the recovery in global equity markets serve as noteworthy examples. 2010 may reward similar principles but in a different way.
2010 is unlikely to offer the same distinct opportunities as 2009, yet a valuable lesson can be observed in the importance of discipline and process in investment decision-making. The worst outcomes were suffered by those who lost discipline, panicked out of risk exposure early in the year and missed the subsequent rebound. Successful investors were distinguished by their rebalancing discipline and the use of rigorous decision-making processes to take advantage of opportunities.
We expect that a well-diversified portfolio should generate a reasonable, but not spectacular, return in 2010. Most asset classes appear priced for moderate economic growth, which seems the most likely outcome. As the global economy transitions from initial recovery to still uncertain longer term trend, there is plenty of scope for renewed volatility as expectations shift. Investors will be well served by heeding the lessons of 2009.
WEALTH INSIGHTS
What to expect in this Tiger year
There is scope for renewed volatility as the global economy transitions from recovery to an uncertain longer-term trend
NOT surprisingly, Asia's strong share market rebound from the global financial crisis and robust economic performance is attracting a lot of investor interest. Ask any investor where the best returns will be over the next few years and the answer is likely to be emerging markets, and in particular Asia. With the developed economies facing an extended period of lacklustre growth amid deleveraging and balance sheet repair, Asia could easily develop into the 'next big thing' on the investment horizon.
REVALUATION
Yen depreciation seems to be the only policy option left in Japan given the re-emergence of persistent deflation and the faltering economic recovery
Two factors stand out as favourable for Asian markets in 2010. The first is that sharemarket valuations are not overly stretched. Asia is not cheap, but metrics such as price-to-book value and price-to-earnings are not yet pricing in an excessively optimistic outlook for corporate profit growth. The second is that monetary policy across the region is likely to remain extremely accommodative as central banks maintain US dollar currency pegs. Central banks can either control their currency or their domestic monetary policy. By pegging to the US dollar, Asia's central banks are effectively importing the ultra-easy monetary policy settings of the Fed. As a result, money and credit growth are likely to accelerate across the region. This will most likely find its way into asset price inflation before showing up later in the year as higher consumer price inflation.
Yet Asia is not without risks. There is still a question as to whether the region can maintain robust economic growth in the absence of strong export demand from the developed economies. The region could also suffer a hiccup if inflation pressures and the potential for over-heated property markets prompt a strong policy response.
It's hard not to be impressed by the longer-term growth potential of the region, especially compared to diminished prospects for the developed economies. Investors need to remember the region's potential for volatility, but Asia stands out as one of the bright spots on the investment horizon.
We do not expect a significant US dollar rebound during 2010. 'Low for long' Fed rates, deleveraging and an economy that needs to transition from consumption to more export dependence, all argue for an extended period of US dollar undervaluation. However, it seems that the pessimism about the greenback is overdone. For a start, the US dollar is already extremely weak. The Fed's real trade-weighted broad US dollar index has fallen 12 per cent since March, and 24 per cent since the 2002 peak. It is now near the previous lows of the past 35 years.
It's worth remembering that currencies are relative. For the greenback to sink lower, other currencies have to appreciate. The poor state of the European and UK economies make it hard to argue for euro or sterling strength; the euro is already close to the 2008 peak. Yen depreciation seems the only policy option left in Japan given the re-emergence of persistent deflation and the faltering economic recovery. China seems unlikely to abandon its de-facto dollar peg anytime soon, and with domestic inflation still negative, is under no pressure to revalue. This means that the People's Bank of China will continue to be the US dollar buyer of last resort.
The US dollar could even be one of the better performing currencies next year if the US continues its gradual economic recovery, firming expectations for an early 2011 start to Fed interest rate normalisation. So although it's hard to make a strong case for the greenback, it may win the 'least-ugly' competition and confound those predicting the end of the dollar-era.
Without question, 2009 tested resolve and discipline as investors weighed the probability of financial market collapse against the prospects of a global recovery. But while it was difficult to stay disciplined in the depths of pessimism during March, there were distinct opportunities and forecasts that saw a patient and disciplined perspective rewarded. The narrowing of credit spreads, the performance of investment grade debt relative to treasuries and the recovery in global equity markets serve as noteworthy examples. 2010 may reward similar principles but in a different way.
2010 is unlikely to offer the same distinct opportunities as 2009, yet a valuable lesson can be observed in the importance of discipline and process in investment decision-making. The worst outcomes were suffered by those who lost discipline, panicked out of risk exposure early in the year and missed the subsequent rebound. Successful investors were distinguished by their rebalancing discipline and the use of rigorous decision-making processes to take advantage of opportunities.
We expect that a well-diversified portfolio should generate a reasonable, but not spectacular, return in 2010. Most asset classes appear priced for moderate economic growth, which seems the most likely outcome. As the global economy transitions from initial recovery to still uncertain longer term trend, there is plenty of scope for renewed volatility as expectations shift. Investors will be well served by heeding the lessons of 2009.