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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