In the near-term, ‘uncertainty’ will be the buzzword
TODAY, global markets are torn by anxieties.
The fallout from the UK’s vote to exit the European Union, the prospect of a strengthening US economy following an anaemic second quarter economic growth, a disappointing Japanese stimulus plan with a total value of 28 trillion yen over several years, of which includes ¥7.5 trillion (US$73bil) in new spending to jump-start the nation’s sluggish economy, concern over the Chinese economy slowing down, saw the markets torn, and an aggressive monetary policy by Bank of England, are key issues to have raised the anxiety.
In the near-term, “uncertainty” will be the buzzword. This begins with the UK, when it kick-starts the process of an unprecedented withdrawal from EU. Possibilities for the UK to head into a short-term recession are on the cards. This explains why the Bank of England (BoE) adopted an aggressive mode in their recent Monetary Policy Committee meeting by reducing the policy rate and restarting the quantitative easing policy, commonly known as ‘printing of money’.
Following BoE’s aggressive move, doubts are creeping up as to whether the US Federal Reserve will be able to raise their policy rate anytime in remaining months of 2016. Expectations for the US economy to perform better in second half of 2016 may not be adequate to justify for a rate hike. More so after a poor economic performance in the first half of 2016.
The US Fed’s potential decision on its interest rate is not just on what is happening with the other countries, but more of its own issues. Having said that, one remains unable to totally wipe out the possibility that the Fed will not raise rates in 2016.
The recent approval by the Japanese cabinet of 13.5 trillion yen (US$132.04bil) in fiscal measures as part of its effort to revive the country’s flagging economy was received with less excitement. Part of the spending will be on rail besides cash payouts to low-income earners and infrastructure spending.
Some disappointment was seen over the Bank of Japan’s monetary policy measures with no signs of it introducing the “helicopter money”, in which the government issues perpetual bonds for the BoJ to underwrite debt.
And now, concerns are that the policies that once halted and reversed the doom loop between the real economy and risky assets could be running out of steam.
It appears that the central banks are racing to ease their respective monetary policy with the hope that low and/or negative interest rates added with asset purchases would help lift their growth and keep their respective currencies weak. This despite the fact that such policies have become less overwhelming.
Should the fear that cheap money policy is becoming less effective grows, pressure will creep on the risky assets. Hence, the global markets direction may not lead to any ‘treasure’ but will certainly entice “treasury papers”. In the past, tail risks tend to be more occasional where strong policy responses tend to be solid and effective. Authorities were able to keep risk off and restore asset prices to their previous highs, if not take them even higher.
Today, the policy mix is suboptimal following overreliance on monetary tools.
Besides, the decades of globalisation that has been a dominant political theme across developed and emerging economies, and have generally been successful, have achieved what they set out to deliver, but worsened the social tensions within countries. While the globalisation may raise overall economic growth, its speed has left many unable to adjust. Consequently, global incomes have risen and worsened inequality.
Hence, with societies still defined at a local level, while large companies have become more international, the most successful are doing so through locally defined tactics. Companies that focus on understanding the environments they operate in and tailoring their strategies will be in a better position to meet the diverse needs of customers, employees, regulators and other stakeholders in the markets in which they compete.
Companies in more global sectors will typically face both greater challenges and opportunities adapting to an environment in which local expectations and regulations are unique and require distinct strategies.
Investors will eventually have to focus on “substance’ and not on noise”.
The Asian ex-Japan markets have opportunities. Looking at the valuation of these markets, they remain attractive, reflected by the price-to-book ratio, which is still at a discount with respect to its long-term average.
Besides, the macroeconomic growth in this region is still better than many advanced economies, growing on average above 4% compared to the advanced economies still struggling to grow around 2%. Furthermore, most Asian markets government bond yields far surpasses the major global government bond yields, on average around 3% compared to the near zero or negative returns from the developed countries.
On the equity front, the markets in this region still provide good value especially for those long-term investors. The region is ultimately a net beneficiary of lower-for-longer commodity prices and offers significant growth opportunities led by infrastructure development, albeit contingent on positive government action.
The Indian market remains the biggest overweight, while China is faced with many pitfalls in its move to be selective and transition its economy into a consumption-led one.
While being aware of the risk relating to currency depreciation in the Asean region, Thailand and Indonesia do have several companies with robust and enduring business models and franchises priced attractively, and we are encouraged by incremental developments on infrastructure projects in both countries.
Improvement in the Philippines’ political outlook warranted adding positions there, given the favourable longer term outlook and potential for infrastructure led investment cycle. Stable growth could see some enticement on the Malaysian equity market.
Anthony Dass is head of AmBank Research, AmBank Group
Did you find this article insightful?