Articles

1 April 2012

Despite the recent stock rally, Mr. Hugh Young, Managing Director of Aberdeen Asset Management Asia says that markets may have moved up a little too quickly, and there is still far too much uncertainty on the horizon.

Where do you think global equities are headed in 2012?

I never pretend to know what will happen in markets. They rarely move in a straight line for very long. We are at a very interesting juncture for the global economy because of the experiments of quantitative easing and Europe’s debt crisis, which is in the hands of the politicians. So far this year, news has been better than expected and markets have rallied.

The European Central Bank’s (ECB) provision of three-year liquidity to banks, together with the U.S. Federal Reserve’s commitment to maintain record low interest rates until 2014, has buoyed risk assets further. But markets may have moved up a little too quickly. There is far too much uncertainty which is why companies are generating cash at record levels, and yet not investing it.

What are your views on global bond markets? Do you see opportunities in this space and if so, where?

They’ve become hugely distorted by central bank policy which has pushed sovereign bond yields to record lows. ‘Safe haven’ bonds (a misnomer surely given underlying deficits) such as Treasuries and gilts appear overvalued, unless deleveraging turns deflationary.

By contrast, many emerging markets, with better finances and more creditworthy than those of the rich world, are being overlooked. We see many investment opportunities in Asia in particular. Sovereign credit ratings are being upgraded, as seen in Indonesia. Asian currencies are also expected to appreciate over time because of their superior economic growth. Global investors who slavishly follow benchmarks are missing out and should rethink their approach!

What is your assessment of the European sovereign debt crisis? To what extent will the European crisis affect global equities, in particular Asian equities?

Greece is bust, so probably is Portugal. I don’t think the politicians have a plan, however. Recent actions by the ECB have averted a potentially damaging credit crunch.

The second long term refinancing operation in February may buy yet more time. But strict austerity measures across the Continent to rein in fiscal deficits will depress growth and government revenue, creating a negative feedback loop. Meanwhile, voters are growing increasingly sceptical of the euro. So there is potential for further significant volatility into 2012. We saw the impact on Asia last year. The region is still very dependent on exports to the West, so when demand falls, growth in Asia slows and more risk-averse investors pull money from local stock markets. Usually they overreact; Asia’s fundamentals are basically very sound.

Recent economic data coming out from the U.S. have been encouraging. What is your view of the U.S. economy in 2012?

I’m not convinced we are anywhere near a point of self-sustaining recovery. Despite the enormous amounts of money that have been pumped into the economy, considerable uncertainty remains. Unemployment figures may have declined but that is partly because people have simply stopped looking for work. Plus public and private deleveraging is still ongoing. With the presidential election looming in November, dysfunctional government is another widespread concern. Europe’s recession and growing tensions with Iran, that are now driving oil prices higher, are further risks.

There is a lot of attention on China right now, including a hard landing, property bubble, local government debts and political handover. What should an investor make of all these news?

I’d be cautious! The domestic economy is weakening at a time when external demand is also slowing. Given the way China works, however, that may not be as bad as it sounds. The government has money to spend to keep up growth. The risks are more about what happens afterwards.

This spending is less and less efficient; investment is a massive 40-60 per cent of GDP (depending on whom you believe). State companies are lending unused cash to those that can’t get it, creating a huge potential debt problem, and the banks will probably need further re-capitalisation. Even so, the stock market may go up because of easier money; savings earn negative real interest rates in China’s banks. From a fundamental perspective, however, very few mainland Chinese companies meet our quality criteria. Corporate governance and transparency remain weak and not many companies are run for shareholders’ benefit.

Lastly, what are the key risks facing global equities in 2012?

There’s still plenty that can go wrong in the world and I’ve outlined them above. The Eurozone sovereign debt crisis and the US economy are the dominant issues. Other threats include the general global economic slowdown as well as geopolitical risks in the Middle East and the impact on oil prices. Trying to predict economic conditions or the stock market, however, is a fool’s game, which is why we prefer to spend time doing what we do best: focusing on companies’ strength and resilience, and whether they will be able to withstand whatever is thrown at them.

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