KUALA LUMPUR: The current gross overvaluation of US markets and the corresponding dumping of Asian stocks provides a buying opportunity in this region, says a National University of Singapore (NUS) professor who has wide experience in asset management.
Prof Joseph Cherian, practice professor of finance and director, Centre for Asset Management Research & Investments (CAMRI) at the NUS Business School expects a reversal back to the emerging markets (EM) in general, and Asia in particular, at some point.
He pointed out that just as during the quantitative easing period by the US Federal Reserve and the European Central Bank (ECB), there was a massive flow of funds into EM.
“We have short memories when it comes to financial markets and tend to flee at the slightest sign of anguish,” he said in an interview last week during a visit here to attend a conference.
Prof Cherian noted that at times like this, there is a crucial need to have strong risk management skills in lieu of timing skills, which are of course great if one has it. However, he point out that only a few do.
“While fund managers must stay diversified, which includes exposure to the US markets, I do think the current gross overvaluation of US markets and the corresponding dumping of Asian stocks by the masses, provides a buying opportunity in this region for the contrarians and stock-pickers at heart,” he added.
Indeed Prof Cherian has wide experience both in the professional and academic fields to provide an overview.
He was managing director, global head, and chief investment officer of the quantitative strategies group within Credit Suisse Alternative Investments in New York, where he had direct responsibility for over US$67bil in client assets managed to a quantitative discipline.
While at Credit Suisse, he also served on the global executive committee and various senior management, investments, and risk committees of the asset management division.
“While having a long-term view in asset management is critical, we should also be able to adapt our investment strategies and manage our portfolio risks in dynamically-changing financial economic environments. Having the financial training and tools at your disposal are a first-order requirement,” he said.
The currency and equities markets, especially in the EM are roiled by the fallout from US-China trade war worries, the strength of the US dollar, various central banks retreating from easy-money policies of the past, and other geopolitical considerations exacerbating an already weak capital markets situation outside of the US.
As investors retreat from emerging and non-US markets, and while U.S. markets have charted fresh record highs, the EMs are being hit by the outflow of funds back to the US.
He recalls that the global monetary stimulus post-Global Financial Crisis (GFC), which created tremendous amount of liquidity flowing into Asian markets and generated terrific returns over the last nine years – almost 238% in cumulative returns from its March 2009 low to its January 2018 high – is now reversing course.
Just on Sept 13, the Hong Kong market was entering a bear market, it is down nearly 17% on a total return basis from its high earlier this year.
“This is an aberration, perhaps a blip due to geopolitical issues. On the bright side, every financial crisis and bear market is an excellent training ground for fund managers and analysts, especially on the risk management side.
“While fund managers must be invested for the long-term, there is always a silver lining behind every dark cloud. Markets and investment flows ebb and flow in cycles, where the greatest growth opportunities and demographics are located.
“So, I do expect a reversal back to EM in general, and Asia in particular, at some point,” he added.
Below are the questions and answers:
1. What is the challenge for asset managers in Southeast Asia, particularly Malaysia in navigating these difficult times brought on?
I think the two big challenges are:
Firstly, competing with the global players who are moving into our markets in a major way with their massive risk management and client servicing machinery. Secondly, the acquisition of asset management talent, which is not only in short supply but highly mobile. That said, some clients prefer the local, high-touch, boutique model, which is an advantage the local asset manager has.
How can they minimise their risk exposure?
Stay diversified in all market cycles and look for hidden gems when all the treasure hunters have left!
2. The EM, whose currency and markets have been roiled by the fallout, how long will this last?
As I mentioned, it is hard to predict turning points to the accuracy of the second order condition we all learnt in high school calculus. However, I do expect a reversal back to the EM in general, and Asia in particular, especially given how grossly overvalued and overtrumped the U.S. markets are, no pun intended.
3. Is US President Donald Trump justified in his launch of the US-China trade war, and the fallout on the EM, Europe and the US. Does the end justify the means?
Of course not. If you have a particular grouse or gripe with another nation, why not use the Dispute Settlement System of the World Trade Organization, which by the way is one of the most active international dispute settlement mechanisms in the world! My CAMRI colleague, Dr Brian Fabbri, has written extensively and eloquently on the consequences of trade wars recently: higher inflation, loss of jobs, less capital expenditures by corporates due to the business uncertainties induced, and a potential global recession if political leaders don’t come to their senses soon.
(Visit: CAMRI Monthly Research Digest: Global Perspectives (by Dr Brian Fabbri)
Thought Leadership @ CAMRI
4. Is the US dollar overvalued vis-à-vis the Yen, Yuan and other major currencies? Do you see a pullback in the U.S. dollar, and if so, what would be a likely time frame?
The US dollar simply reflects the current strength of the U.S. economy vis-à-vis the rest of the world. I expect a revision to the mean, but it will take a while for that to materialize, especially with the U.S. playing the global “Big Bully” role so effectively.
5. What is the best portfolio a fund manager can have to hedge his risks while targeting a reasonable growth in the investments? This could apply to fixed income, equities.
If you don’t view derivatives as weapons of mass destruction, a bit of portfolio structuring using options, swaps, futures and other risk management products may help here. Otherwise you should do ok by simply sticking to the high qualities, more liquid names, high dividend paying stocks, etc., just to ride out the vagaries of current markets.
Note: The National University of Singapore (NUS) Business School will launch the executive Master of Science in Investments and Portfolio Risk Management (EMIR) graduate programme in April 2019.
The 14-month EMIR programme caters to busy professionals with its part-time executive class format.The EMIR programme aims to build a group of well-informed, well-trained and well-intentioned professionals who are able to keep up with the latest developments of the future digital economy, and particularly in light of how these “disruptions” are transforming the business of investment and risk management.