Market Crisis Just A Speed Breaker?

Source : The Business Times, 15 Aug 2007

While agreeing that the bull market is intact for long-term investors, analysts say it would be prudent to revisit your asset allocation in the wake of the sub-prime crisis, reports GENEVIEVE CUA

The fallout from the crisis in sub-prime mortgages in the US has sparked a rout in credit and equity markets in recent days. The biggest question in investors’ minds must be whether the bull market in asset prices, fuelled by ample liquidity and relatively low interest rates, is over.

In this edition of Executive Money, strategists, analysts and fund managers share their views.

For long-term investors, the consensus is that the bull market is intact - but the consolidation may not be over. So far on a year-to-date basis, equity market indices based on the MSCI, remain positive, with gains of up to 24 per cent between January and Aug 13.

For some time now, strategists have been telling investors to take some profits off the table, while staying invested. Now is not the time to panic, but it would be prudent to revisit your asset allocation. An asset class that has risen over the years could now comprise an outsize share of your portfolio. Here is what the experts say.

Lim Heong Chye, APS Komaba Asset Management:

‘The uncertainty may drag on for a while. Sub- prime mortgages actually comprise a small portion of the entire US mortgage backed securities market. But once they were packaged into collateralised debt obligations (CDOs), the contagion could spread into credit related issues - as it has today.

In credit markets, the only safe place is Treasuries. There will be volatility in the coming weeks, especially for credit issues lower than investment grade. In our fund we hold a lot of cash now, about 20 to 30 per cent. We’re looking to deploy the cash into issues where we see value. We bought some government bonds.’

David Bensimon, technical analyst and trader:

‘Ultimately there is no change to the larger picture. 2007 is a consolidation year. We haven’t finished the consolidation across a range of markets. My price target for the Straits Times Index is to go down to 2800. I’m looking for the S&P 500 to move to 1,360 and ultimately to 1,260. There is a structural difference between today’s environment and the past. In the past three years, the market drops have been 6 to 7 per cent.

There is a process of a re-pricing of risk to appropriate levels across a range of financial markets - interest rates, equities, commodities and currencies - because of the recognition that yields were not high enough to reflect the level of risk. With central banks moving to support the market, the perception has not been that the banks are solving the problem, but that there must be a bigger problem.

Between 2008 and 2010, we’ll see a resumption of tremendous prosperity. We really are living in a prosperity-driven era of growth. We’re going to see substantial further gains. But this year is one of transition, and that has not finished. For stock markets, it’s almost just beginning.’

Dr Shane Oliver, AMP Capital Investors head of investment strategy and chief economist:

‘While shares have had a good bounce in recent days and there are signs that the credit market turmoil may be settling down, it’s too early to say the falls in shares are over.

While the ride is likely to be rough over the next few months and further declines are possible, the recent slump in share markets should not be seen as the start of a bear market. The historical record indicates that corrections of up to 20 per cent are not unusual in the context of cyclical bull markets, so investors should not get too alarmed by the recent turbulence.’

HSBC Investments:

‘Markets are now pricing a high probability that the Federal Reserve will cut US interest rates soon. In July this year we became concerned over a financial accident occurring in the second half of 2007. As a result, we have been cutting back our equity exposure since mid-July.

We do not think the current volatility will last long and would look to increase equity exposure on weakness. Global equity valuations remain reasonable by historical comparison, and corporate earnings remain robust. As the economic cycle remains healthy, the longer term trend for equities is expected to be up.’

Robin Parbrook, Schroders head of Asia ex-Japan equities:

‘We expect Asia to be correlated to any short-term sell-off in global equity markets. But we continue to believe that buying Asia on weakness is the correct strategy. The region has a strong long-term growth outlook, and Asia’s dependence on the US economy for its growth has been much reduced.

While the current problems are worrying in terms of risk appetite (and the subsequent risk of market volatility), they do not undermine the fundamental investment case for Asia. The corporate sector in Asia is in good shape. Balance sheets are strong, cash flows are buoyant, dividend payouts have been rising and capital expenditure plans to date have been relatively disciplined. Economically and politically, the region also looks sound. With the macro-economic risks looking relatively benign in the region itself, we view a 15-20 per cent pull back from recent highs as a good entry point for long-term investors.’

Prudential Asset Management:

‘The recent sell-offs have been less dramatic than previous ones. Are investors really worried, or are they merely ‘testing’ the solidity of the underlying demand by aggressively selling? We think it is the latter.

Strong Asian growth will continue to support corporate earnings in this region. Corporate credit quality especially in Asia remains solid. 2007 may ultimately prove to be no more than a ’speed bump’.

Short-term valuations may look high but Asia’s valuations are not that high when looking at the longer term and comparing them against world levels. The Asian re-rating story is not over.’

Chen Zhao, managing editor, BCA Research (global investment strategy):

‘Market sentiment is still very fragile and emotional, as investors have been spooked. We urge clients to maintain composure. We should always be ready to buy when there is blood on the street.

The key point is that unless one believes the blow-up in the sub-prime mortgage market could significantly alter the underlying trends in the global economy and stock prices, the recent downturn in equity prices is in the very late stages and might have entered its final capitulation phase.

To be sure, like any bottoming process, this one will be volatile. But the prudent strategy is not selling into strength. Rather, investors should wait for opportunities to buy.’

Clariden Leu investment strategy team:

‘Equity markets in the emerging economies held their ground remarkably well in the recent correction. After a well-earned breather in the summer, marked by heightened volatility, equity markets will resume their climb.

We recommend maintaining an overweight in equities and expanding it on price setbacks. Our preferred markets are Europe and selected emerging markets. In the light of further rises in interest rates, we remain underweight in bonds and overweight in the money market.’