May 05 2012
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Global allocation still favours equities
Saturday, May 05, 2012
Despite a surprisingly strong if volatile performance in the first part of the year, there is still time to invest in equities, said Giles Keating, global head of private banking research at Credit Suisse , during his recent visit to Dubai.
“In the equities world there’s some juice left,” he commented, but cautioned that “it won’t be a straight line”.
“There are still worthwhile gains for those people who are happy to weather the volatility, and have a perspective of over 9-12 months rather than 1-3 months.”
In Europe, Keating said Germany offered opportunities, though he is quite categorical about avoiding bank stocks. He feels that German industry’s strength is partially reflected in some of the stock valuations and they are ripe for investment.
But, he added that Credit Suisse is “not really buying the indexes in those countries because [they] have a lot of bank stocks which are not likely, in our view, to perform very well in the coming period.”
He agreed that in Europe there are stocks that look set to continue having a good dividend yield. But such stocks are “low risks and low returns” so “they will almost certainly lag behind the market, if we are right in thinking that over the next 9-12 months we are essentially in a mild boom market”. However, the return on these stocks will still be attractive compared to many fixed income instruments.
At present, Credit Suisse has a bias towards technology, some construction and raw material as well as consumer stocks. They are cautious on some of the health care stocks.
While they are avoiding banks, Keating points out “if you are careful and do your homework, then there are bank bonds, which are ... rather attractively priced.” The bank believes commodities are only just beginning their run, said Keating.
For Keating, a fairly typical middle of the range global portfolio would not have very much cash — “maybe 5 per cent, give or take.”
He would have 20 per cent in various alternative categories which include gold, other commodities, hedge funds, private equity (for the more sophisticated investor) and also some form of real estate exposure.
Credit Suisse is a bit below their benchmark on gold but: “we still think gold has got one more burst to go. It’s become a lot more volatile and it’s not quite as clear cut as we saw it before.”
The remaining 75 per cent of the portfolio is allocated between stocks and bonds and that would very much depend on an investor’s risk profile.
For those investors with a longer-term horizon —that is 6-12 months — it would mean overweight on equities, even through the short-term volatility coming up, as stocks would be higher a year from now by a respectable margin.
Low in core markets
As for fixed income: “In terms of the duration we still want to keep it short, as the yields kind of moved around and they [are] in some structural sense too low in the core markets” said Keating.
However, he would recommend holding some blue chip corporate bonds that are well supported by large amounts of cash on the balance sheet.
There are also a number of corporate bonds from emerging markets that offer good “risk versus reward” relative to some of the developed countries, often with large amounts of cash and a favourable debt ratio, said Keating. Bond investors also have the option of a currency play.
“Well-diversified local currency portfolios can be very interesting, including the [yuan] as it becomes more widely available,” he said.
Dubai Markets in the Middle East and India offer good value and are not particularly expensive, but their small size and political risks count against them, according to Giles Keating, global head of private banking research at Credit Suisse .
They need international investors to be more willing to take on risk, but: “We are not there yet, quite honestly,” Keating said.
However, Kamran Butt, Dubai-based head of Middle East Research at Credit Suisse Private Bank, is quietly confident that in the next review in June, the UAE will have a “very, very high” probability of entering the MSCI emerging markets index.
“Now that is when we start getting traction from overseas investors. Until you become a part of the benchmark index, these [markets] will always be an off-benchmark bet,” Butt explained.
Keating said the UAE was probably a bit ahead of Qatar on the list of those seeking MSCI admission.
“And you’ve got the added kicker of Saudi [Arabia] announcing the opening [of its market],” Keating added.
Saudi Arabia, with a traded value of $3 billion (Dh11.01 billion) “is a viable market,” Butt said. He, however, added that it is not directly accessible for international investors, and if it wants to enjoy some of the global portfolio flows like China and India, it has to open up.
He is hopeful that the Capital Markets Authority will over the next few quarters take steps towards that.
For now, quarterly results will drive market sentiment. Also, in Saudi Arabia there is a healthy pipeline of initial public offerings this year — a great driver for investment, according to Butt.
He is also excited about the recent announcement of legislation in India, which will allow foreign direct investment into equities.
“That is a huge, huge potential stimulus to drive up the market,” he said.
But for now, he expects the Indian market to be range bound.
“Again there’s a little bit of uncertainty, particularly on the economic policy and how they are managing the rupee,” he explained.
While there has been a bit of a pull-back in Indian markets, he sees this as an opportunity for investors to move into India for the medium to long term.
Butt sees value in some of the small- and mid-caps that are playing laggards.
“Some of the performance that we have seen has not been coming from the large names, but from the mid caps. [They have] less reliance on the developed world and more on domestic growth.”
By Gaurav Ghose?Financial Features Editor
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