With 2010 drawing to a close and 2011 around the corner, here are our forecasts of the key investment themes for 2011
Author : iFAST Research Team
IFAST 2011 Investment Themes
The end of 2010 draws near, we find several themes that will very likely persist (and emerge) in 2011.
Growing confidence about sustainability of global economic growth, with growing investor risk appetite. 2009 was the turning point for the global financial crisis, with 1H2009 marked by severe economic contractions while 2H2009 was the start of an economic recovery. 2010 saw the start of a global economic recovery on a full year basis, with world GDP growing by an estimated 4.8%, compared with a contraction of 0.6% in 2009. In 2010, however, the recovery came amidst a lot of nervousness in the financial markets, with most investors worrying about the possibility of a double-dip recession. 2011 will see continued recovery of the global economy, accompanied by growing investor confidence of its sustainability and growing corporate business investments.
Record-high earnings and revenue to be seen in many major countries. As the economic recovery continues on a second full year, many key regions and countries will be witnessing record high earnings in 2011. Initially, the profit growth was driven partially by cost controls. From 2011 onwards, quite a lot of regions and countries are starting to see record high revenue as well, causing the recovery momentum to be increasingly broad based and sustainable.
Emerging markets to be the growth drivers of the world. For a long time, many people have been living with the notion that US is the driver of global economic growth. However increasingly, investors will start to accept that going forward, various emerging markets especially China, are going to the real drivers of global economic growth. That is, even if the GDP growth rate in the US is uninspiring, the world can hum along.
Monetary policies to transition from an ‘easing mode’ to a ‘tightening mode’. In 2010, as investors and government fear a potential ‘double-dips’, there was a lot of attention on the ‘quantitative easing (QE II)’ that the US put in place. As global confidence increases about the sustainability of the economic recovery, fears of recession will be replaced by increasing fears of inflation. This is especially so in emerging markets, including China and India. As 2011 progresses, central governments around the world will increasingly transition from an ‘easing mode’ to a ‘tightening mode’. Long term government bonds yields will start to increase (from a long base), and many central banks will start to hike interest rates. This will generally be seen as negative news for stock and bond markets, but we do not think that it will derail the overall positive environment for the equity markets.
Resurgence of optimism about technology, 10 years on. 10 years after the dot-com crash, investors remained generally cautious about the technology sector. As the result, despite a year of record earnings for the sector in 2010, the consensus spent a large part of their time worrying about a potential downturn in 2011. We believe that as 2011 progresses, investors will become increasingly upbeat about the global technology sector. They will recognise that many years of corporate under-investments has led to the need for businesses to start boosting their capital expenditures in the technology sector a more broad-based manner. Consumer spending in this sector will continue to be strong, after a robust growth rate in 2010, driven by mobile devices such as smart-phones and tablets. Just as importantly, we believe that the valuation for the sector will start to expand again, in line with the growing optimism towards the sector.
Gold to lose its lustre. The world has been in love with gold in the last few years. As 2011 approaches, predictions by many people of another strong year for gold continue. However, it is clear to us that the forecasts of a strong gold sector are becoming increasingly less fundamentally driven, since the genuine demand for gold has not been strong. Instead, the demand for gold has been driven by investment or speculative demand. The ‘demand for gold’ story has been driven by stories of ‘a weak USD’, ‘the need for a safe haven as different kinds of crisis continue’ and ‘the lack of strong investment cases in other asset classes’. As 2011 unfolds, we believe that such stories will no longer carry a strong weight.
Emerging market currencies to strengthen vis-à-vis US and Euro. We expect that investment flows to the emerging markets to be strong in 2011, in search of strong growth rates and yields. This should cause many emerging market and Asian currencies to continue to be firm in 2011.
Implications for Investors
Equities to outperform bonds – investors should continue to overweight equities. In an environment of improving confidence about the sustainability of global economic growth, corporate earnings hitting record highs in many countries, and still attractive valuations, we expect equities to outperform bonds. Our ‘overweight recommendation’ for equities remains.
North Asian markets are expected to do better than South East Asian markets. The South East Asian markets such as Indonesia and Thailand have surprised many investors by the strong outperformance in 2010. As a result, now the North Asian markets such as South Korea, China and Taiwan look significantly more attractive. We expect the North East Asian markets to play catch up in 2011. Our recommended funds for the respective markets are: Greater China - First State Reg China South Korea - Fidelity Korea USD Taiwan - Fidelity Taiwan USD
A strong year is expected for global technology stocks – Buy technology funds. Technology stocks are expected to see an upward rerating, following 10 years of de-rating. The upward rerating will be propelled by the realisation by investors that the technology sector is a growth sector – a previously universally accepted wisdom that they seem to have forgotten in recent years. Our recommended global technology fund is Henderson Global Technology.
Avoid gold funds. Investors should realise that this ‘hot money’ investment theme carries tremendous risks. ‘Hot money’ can come fast, and leave fast. It is not wise to build an investment portfolio based on that. Reduce exposure to this asset class.
Outperformance of the small caps. As the equity market recovery continues into its 3rd year, and as the recovery becomes more broad-based, small and mid-cap stocks are likely to perform better than big cap stocks which led the initial stages of the rally. Increase exposure to small and mid-cap funds. Some of the funds to consider are Aberdeen Asian Smaller Cos and DWS Asian Small/Mid Cap A SGD (for exposure to smaller Asian companies) and LM Royce US Sm Cap Opp A USD Acc (which invests in smaller companies in the US).
Favourite single-country equity market:
Taiwan. Among the single country fund exposure, our pick for 2011 is Taiwan. Taiwan will benefit from a resurging global technology sector as well as improving economic links with China, which is increasingly becoming the key economic driver for Asia. Our recommended Taiwan fund is Fidelity Taiwan USD.
Least favourite single-country equity market: Indonesia. Following 2 years of outperformance, the Indonesian market looks expensive currently compared to most equity markets. Our studies also find that, historically, markets that have outperformed strongly over two years have a stronger chance of underperformance in the subsequent year.
Fixed income investments:
Bond funds are an important instrument for investors who want to diversify away from equity market risk. With improving investor confidence, bond funds in the high yield and emerging market debt space are likely to fare better than safer lower-yielding global bonds. Investors should remain cautious on long-duration developed sovereign debt, which are most susceptible in a rising interest rate environment. In addition, SGD-hedged bond funds are preferred to minimise any negative impact of currency volatility on returns. Our recommended EM debt fund is United GEMS Investments S$ while our PRU Mthly Income Plan Cl A is our recommendation in the high yield bond space. There two high yield funds which are SGD hedged. These are the Allianz Global US High Yield SGD Hedged fund, and the Fidelity Asian High Yield AMDIST-SGD hedged fund.
For the more risk adverse investor, short-duration bond funds are a good consideration as these funds are low risk and hold bonds that mature quickly and so will be able to benefit from a rising interest rate environment. Investors can consider short term duration bond funds like DBS Enhanced Income SGD or Fullerton Short Term Int Rt C S$.
The Research team is part of iFAST Financial Pte Ltd.
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