Fund managers still careful not to bask in any post-Fed glow
GLOBAL stock markets have been volatile due to concerns over the United States sub-prime crisis. Rate cuts by the US Federal Reserve (Fed) have helped to allay investors’ fears. But is the worst over?
We polled 19 fund managers for their views and their take on the investment outlook for markets and the opportunities they see on the horizon.
Fund managers believe that financial market uncertainties will persist despite the Fed’s 50-basis-points cut on Sept 18. The effectiveness of this move will only become evident in the coming months.
However, they said that it might not be sufficient to ease credit woes, which could resurface, especially if more casualties emerge from the sub-prime saga.
There are fears that delinquencies could rise as adjustable rate mortgages, which account for the bulk of US sub-prime loans, are re-priced in the months ahead.
Many think that the Fed will need to cut rates further — by between 25 and 50 basis points before year-end. However, there are concerns that the Fed’s hands may be constrained if inflation picks up due to the weaker US dollar and higher oil prices.
Most said that the subprime crisis is unlikely to cause the US or other global economies to slip into a recession, as long as the crisis is not prolonged and the US housing market stabilises.
“While US economic growth could well remain below its trend rate for an extended period, leading indicators and business confidence surveys are not consistent with a recession,” said Henderson Global Investors.
Even if there is no recession, many foresee a slowdown in growth due to the sub-prime crisis.
UOB Asset Management said that although downside risks to economic growth have risen, it is of the view that unless there is a severe dislocation in financial markets, the current turmoil is unlikely to send the real economy into a recession.
BNP Paribas Investment Partners said that “globally, leading indicators hint at a deceleration in growth almost everywhere, but they also show that activity is still fairly healthy, especially in emerging markets”.
Despite turmoil in the stock markets, equities remain as fund managers’ preferred asset class, given the still healthy fundamentals and reasonable valuations.
“We remain positive on global equity markets as economic growth is still high with strength in Europe and Asia compensating for softness in the US,” said ING nvestment Management.
However, fund managers warned that markets are likely to remain choppy until credit conductions improve.
Barclays Capital sees equities outperforming most other asset classes, but warned that returns from equities are likely to moderate and volatility is expected to increase.
HSBC Investments also expects equity markets to remain volatile in the short-term as markets work out the full impact of the sub-prime problems. Nevertheless, it sees corrections as an opportunity to pick up bargains.
Lion Capital Management favours Asian equities, saying: “Asian equities should be able to weather the storm because Asian economies in general continue to show robust growth, with corporate profitability and balance sheets remaining strong.”
Aberdeen Asset Management reckons that Asia and emerging markets have solid fundamentals and continue to trade at discounts relative to their developed counterparts.
Some fund managers also expressed their support for European and US equities.
Schroder Investment Management favours European equities as they offer strong earnings- per-share growth. UBS Global Asset Management favours US equities as it thinks that they are attractively valued.
Investors are hoping for the seasonal year-end rally, but most fund managers were noncommittal about the prospects, saying that it depended on how central banks cope with the unfolding turmoil in credit markets.
Deutsche Asset Management said that with the uncertainty of the sub-prime crisis, it is difficult to foresee if stock markets will pick up towards the end of the year.
Other fund managers said that it does not see any near-term catalyst that would spur stock markets to rally.
SG Asset Management sounded a note of caution, saying that while fundamentals were strong for Asia-Pacific markets, risk factors may cause volatility to increase in the next few months.
Overall, fund managers were guarded about the short-term outlook for stock markets and warned that the worst may not be over. However, most of them they were sanguine about equities’ medium-to long-term prospects.
Aberdeen Asset Management, ABN AMRO Asset Management, Allianz Global Investors, Barclays Capital, BNP Paribas Investment Partners, DBS Asset Management, Deutsche Asset Management First State Investments, Henderson Global Investors, HSBC Investments, ING Investment Management, Lion Capital Management, Phillip Capital Management, Prudential Asset Management, Schroder Investment Management, SG Asset Management, Templeton Asset Management, UBS Global Asset Management and UOB Asset Management took part in the poll.
The writer is the chief editor of finatiQ — Bank of Singapore.
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