Download 15 smart ideas to outwit the wiliest investment

COVER STORY
Keeping close watch on the ticker board?
15 smart ideas to outwit the wiliest
investment wolves this Year of the Sheep
Japan equities, 5-year US treasuries, gold, or oil – find out where best to put your money in 2015.
2
015 is the Year of the Sheep based on the Chinese
zodiac, and fittingly, one of its main investment
themes is the flock mentality. There is a strong
consensus on where investors should, on paper, put
their money, such as equities, but there will be plenty of
opportunities to break away from the herd and cash in
on lucrative market opportunities. Compiled from our
diverse council of financial guides, these top 15 smart
investments in 2015 represent some of your best bets for
a safer and more profitable investment year.
1. Japan equities
Experts are bullish on Japan equities in 2015 due to a
number of supportive factors such as Bank of Japan’s
(BoJ) promise to expand its qualitative and quantitative easing, increasing emphasis on shareholder value,
continued pension reform, and room for further stock
market rallies.
“The divergent monetary policies between the US Federal Reserve and the BoJ will almost certainly continue
to put downward pressure on the Japanese yen (JPY)
against the US dollar (USD). This is very bullish for equities as the correlation between the USD/JPY exchange
rate and the equity market is higher than 90%,” says Hans
Goetti, head of investment Asia at Banque Internationale
28 SINGAPORE BUSINESS REVIEW | JANUARY 2015
à Luxembourg’s Singapore branch. He adds that share
buyback momentum is strong and due to a similar high
correlation, will represent a very positive development
for Japan equities.
Japanese equities also have scope to rise further despite
a strong rally in the stock market, according to Simon
Cox, investment strategist, Asia-Pacific at BNY Mellon
Investment Management. Japanese corporate earnings
have already bounced back strongly from the depths of
the financial crisis – they are 280% higher than they were
at their lowest point in 2009 based on most recent Ministry of Finance data – but share prices have yet to fully
reflect this recovery. “The TOPIX still has some catching
up to do,” says Cox.
2. Developed Asia equities
Other developed Asian equity markets are also looking good. In particular Korea, Taiwan and Singapore
seem especially promising and could benefit from the
strengthening US economy, says Robert Rountree, global
strategist at Eastspring Investments. “The developed
Asian markets, having been ignored in 2014, now look
attractively valued. Any uptick in export orders or a
strengthening of world growth could lead to renewed
attention on these markets.”
“The
developed
Asian markets,
having been
ignored in
2014, now look
attractively
valued.”
COVER STORY
Among these, Korean equities may be one of the most
attractive investments in Asia for the first half of 2015,
says Dr Ekkehard J. Wiek, managing partner at Straits
Invest.
He says the Korea market holds an unusually high
number of stocks with a very low valuation paying high
dividends which have started to rebound from their
recent drawbacks, with especially attractive picks in the
small and mid caps segments. “Investors who use the
current weak market sentiment and systematically filter
stocks with high intrinsic value should be able to benefit
from this situation.”
3. China equities
Investors may be wary of China equities due to low
valuations and several years of underperformance amid
worries about slowing growth and other macroeconomic
concerns, but Rountree argues that the opportunities
exist for those looking at a longer view.
“China looks very attractively valued. This value
may not be priced out until more clarity appears in the
macroeconomic data. Again, one to watch; when it does
bounce back, it could be far, fast and furious.”
He points out that Korean companies are increasing
their China investments in anticipation of a forecasted
upswing driven by rising consumer demand.
“Slowing growth, concerns about over-indebtedness, a
seemingly out-of-control housing market, opaque local
government finances and the lack of a meaningful policy
response have contributed to this malaise. Yet there are
reasons to be more optimistic about Chinese equities,”
says Daniel Murray, chief economist at EFG.
He believes that, even though China’s gross domestic product growth has slowed to around 7.5% from
previous double-digit highs, this is part of a “natural
maturing” of its economy and is still a stronger growth
pace compared with most other countries. China also
boasts relatively low levels of central government debt,
and the government is rolling out a stream of fiscal and
monetary stimulus measures that, when combined, can
provide a large supportive effect.
Ekkehard Wiek
Shrikant Bhat
Hans Goetti
Robert Rountree
Jim Swanson
compared to the A-shares market, according to Quam
Asset Management.
The launching of the Shanghai-Hong Kong Stock Connect, which should boost investor access, together with
better corporate governance, will likely trigger re-ratings
in these sectors. Investors might also consider dipping
into the slew of Chinese companies that are expected to
list on the Hong Kong Stock Exchange due to its lower
financing cost, better liquidity and more efficient fundraising platform.
5. US financial, tech and consumer sectors
Given a forecasted acceleration in the global economy,
US equity markets should deliver a respectable performance, with especially attractive picks in the financial
and information technology sectors, according to
Shrikant Bhat, managing director, head of wealth
management at Citibank Singapore. He says the US
financial sector offers earnings momentum in line with
the rest of the market, but valuations are well below.
Meanwhile, the IT sector scores well on free cash flow
and balance sheets of firms that remain strong.
Investors in the US market may also want to take a
long position on the consumer discretionary sector, one
of the worst performing sectors in 2014, whose fortunes
may start to turn around in 2015. As of mid-November,
the S&P500 Consumer Discretionary index was up a
mere 3.6% compared with 10.4% for the S&P500 in
aggregate and 21.0% for the top-performing S&P500
Health Care sector index, yet there are signs that the
fundamental backdrop is improving, argues Murray.
Steady improvements in the US labour market, which
have been reflected in rising consumer confidence despite lacklustre wage growth, along with recent declines
in energy prices combine to support higher discretionary
consumer spending in 2015.
6. US large cap stocks
Among the investment options in 2015, US large caps
represent the dependable picks with excellent operating
leverage that can deliver profit in spite of sluggish end
4. Hong Kong stocks
Over in Hong Kong, investors should look into the Pharmaceutical, Green and Telecommunications, and Media
and Technology sectors, which are trading at discounts
The rally in Japan’s share prices has yet to match
the recovery in corporate profits
Source: Ministry of Finance, Tokyo Stock Exchange, via Thomson Reuters Datastream.
Last data point Q3 2014(Topix)
Amid globalization, Asian equities are still on top
SINGAPORE BUSINESS REVIEW | JANUARY 2015 29
COVER STORY
markets in Europe and China. Large cap multinationals
have also managed to raise their profit even as the rest
of the US economy shrank in the first quarter of 2014,
showing their earnings resilience. “The forward P/E for
US large caps is lower than the broader market, so valuations are reasonable,” says Jim Swanson, chief investment
strategist at MFS Investment. “Their operating leverage
is being driven by low unit labour costs, which are much
lower than those in Europe and Japan.”
7. Canadian equities
Asian investors focused on the US market would do well
to look further north to Canada, which despite requiring a bit more research work, holds a wealth of attractive
undervalued stocks ripe for the picking.
“We find plenty of attractive undervalued stocks from
all industries,” says Straits Invest’s Wiek. “Canada stocks
for the next couple of months will make up the highest
weighting of all countries in our global equity portfolio,”
he adds, explaining that the Canada market is still some
20 % below its 2008 high.
8. European equities
Across the Atlantic, European equities –especially those
with a large proportion of overseas sales – should be a
priority for investors, says EFG’s Murray. Investors are
advised to shake off their fears and consider taking a
long position on underperforming European equities as
euro weakness translates to better results when overseas
revenues are translated back to euro.
“Combining the lagged impact of a weaker euro with
improved competitiveness in many of the countries that
have experienced the most extreme economic malaise
over the past few years should result in improving overseas sales volumes in the first half of 2015,” says Murray.
Europe may be grappling with a battery of macroeconomic concerns but policy action from the European
Central Bank (ECB) will be a key catalyst for the region,
which is why Bhat is also remaining optimistic on Eu-
Albert Cheng
Cedric Tinguely
Simon Cox
Vasu Menon
ropean equities. “The resulting improvement in macro
backdrop and weaker currency should fuel companies’
earnings results.”
Bhat expects further price gains notwithstanding the
re-rating of stocks measured through the increase of
price-earnings ratio from 10x to 17x. He says this outlook is driven mainly by earnings growth and supported
by what he foresees as an improving regional economy
and liquidity. Bhat cites how the year-on-year growth
rate for 12-month forward earnings had turned positive
for the first time since 2011, and he believes the Euro
Area nominal gross domestic product should continue
improving over the next 12-18 months.
“It’s difficult to be bearish on corporate earnings based
on this economic outlook,” says Bhat. “Within Europe,
we suggest investors consider sectors like Financials and
Construction, for exposure to both attractive valuation
and positive relative earnings trends.”
9. Unit trusts
With most analysts preferring equities, investors seeking
a more diversified exposure may consider buying gradually into unit trusts, says Vasu Menon, vice president,
wealth management Singapore at OCBC Bank. “It’s best
to buy gradually over several months next year instead of
trying to time markets as volatility could increase once
markets get wind of an imminent rate hike by the US
Federal Reserve.”
10. Asian and US high yield bonds
For investors chasing income, Asian and US high yield
bonds will remain a strong option in 2015. Rountree says
the expected increase in rates will unlikely be strong and
leaves the door open for bonds as an option. “While US
rates will likely nudge higher in 2015, it will unlikely be
so strong as to undermine the income story.”
Menon believes bonds will allow investors looking
to retain a semblance of prudence to balance out their
portfolios, which could tend to be bulky in equities. He
believes high yield bonds are superior to investment
grade ones because of their wider credit spread which
will cushion the impact of higher interest rates in 2015.
11. 5-year US treasuries
The end of the aggressive US Federal Reserve balance
sheet expansion will signal a rise in interest rates, and
Developed Asia looks attractive
Confidence on US economy improves
30 SINGAPORE BUSINESS REVIEW | JANUARY 2015
Source: Eastspring Investments, MSCI and IBES from Datastream, 3 November, 2014. Note
that the “Z” valuation is a composite measure giving equal weighting to the variation of the
historical price to book ratio from its long-term trend and the variation of the prospective price
earnings multiple from its long-term trend. The two outer dotted lines represent the limits
within which around 70% of all values lie. The middle dotted line indicates the 10-year average.
COVER STORY
based on past rate hiking cycles, will lead to a flattening of the yield curve, most likely from shorter duration
maturities, says Murray.
“Although the yield at the long end of the US government curve is low in absolute terms, the slope of the
curve is relatively steep. This suggests that the flattening
is likely to come from shorter duration maturities,” he
says. “As confidence in the robustness of the US economy
improves and expectations about policy normalization
begin to solidify, so we expect the belly of the curve to
sell off and the five year yield to rise.”
12. Low cost index funds and exchange-traded funds
While most analysts are bullish on global equities and
global bonds, more risk-averse advisers point to low
cost index funds and exchange-traded funds as viable
alternatives. These investment options are “excellent ways
to minimize cost and obtain broad diversification” in any
investor’s portfolio, says Rodney Comegys, principal,
head of investments at Vanguard Asia-Pacific.
Based on his firm’s forward-looking projections,
Comegys points to a median ten-year forecast of around
8% return for global equities and 3% for global bonds,
both below their respective longer-term averages. Given
this low-return environment in the next decade, investors are better off paying lower fees in lower cost funds
– especially as, according to Comegys, they outperform
higher cost funds over time.
13. USD against euro
Consensus is bullish on the USD against various currencies, but will be especially strong against the euro as the
future actions of the ECB will likely be “too little too late,”
according to Cedric Tinguely, chief trader at Bordier &
Cie (Singapore).
“When the US Federal Reserve did all their quantitative easing, it did work well because they were ahead of
other central banks, therefore the stimulus and liquidity
they injected into their economy provided its full effect,”
he says.
“Even if Mr Draghi announced his willingness to
increase the ECB balance sheet to where it was at the
beginning of 2012, by roughly 1 trillion Euro, they will
do it overtime and will probably reach full speed only by
the end of 2016.”
Factoring in the added stimulus to the Japanese
economy, Tinguely feels Europe might have to do more
than targeted longer-term refinancing operations and
buying of asset-back securities.
14. Gold
For more prudent investors, gold remains a solid investment choice and remains a fundamental part of any
long-term wealth preservation and asset diversification
strategy, argues Albert L. H. Cheng, Managing Director,
Far East, World Gold Council.
“The accessibility of the gold market along with its size
and liquidity provide attractive benefits for investors in
gold, particularly as a complementary asset alongside
equities and fixed income securities,” he says. “The diversity of gold-backed and gold-related products means that
gold can be used to enhance a wider variety of individual
investment strategies and risk tolerances.”
“Investors are
better off paying lower fees
in lower cost
funds since
they outperform higher
cost funds over
time.”
15. Oil
Oil prices have been coming down over the past few
months due to reduced US reliance on oil imports amid
rising domestic shale activities, among other factors,
but they are unlikely to dip much further below $70 a
barrel, says Murray. Investors are advised to take a long
position in the commodity as he expects the price price
of West Texas Intermediate (WTI) crude oil, which has
been down more than 30% over the past few months, is
unlikely to dip much below US$70 a barrel.
Gold hasn’t lost its shine yet
Listed European stocks: internal and
external sales
Fed likely to raise interest rates in 2015
Source: Factset, EFG calculations
Source: Bank of Singapore
SINGAPORE BUSINESS REVIEW | JANUARY 2015 31