Equity investors facing hunt for value in 2015
Wild swings in equities over the past year have hammered home the message that deeper analysis will be needed to locate value opportunities in 2015.
While the S&P500 grew by more than 11% last year, the Shanghai composite index surged 53%, despite volatile price swings on the Chinese bourse during December.
Slowing Chinese GDP, which moderated to an estimated 7.3% last year, contrasts with predictions for decent but unspectacular full-year US growth of more than 2%. As a result, equity investors are left without a clear picture of the health of the world’s two largest economies.
Given that largescale US bond purchases ended in October last year, combined with an expected rise in US interest rates in 2015, certainty is now in short supply among investors.
Kevin Anderson, head of Asia-Pacific investments for State Street Global Advisors, said market volatility over the past year meant there was greater value to be found outside of the generally consistent US growth of recent years.
“Where is the value? Policy divergence is underpinning a lot of it,” Anderson said. “Despite US growth being firmly on track, the US markets are at the high end of valuations. There is greater value in Japan and pockets of Europe.”
Policy divergence has been one of the themes to emerge from industry players’ equity crystal balls; this has been the result of a multiple-speed world economy, with some countries such as the US winding down monetary easing, and Japan and the eurozone either cranking it up or just starting.
State Street sees divergent economic and monetary policy outlooks as favouring investors that “adopt active strategies to harvest the most compelling opportunities”.
Anderson suggested Japanese company multiples were attractive compared to the rest of Asia, with government plans to cut the country’s corporate tax rate this year by about 2.5 percentage points forecast to boost firms’ prospects.
While Anderson said he was confident of finding value in Japan, he stressed the need to look for pockets of value. And while the eurozone continues to suffer, Anderson noted he saw opportunity there among certain stocks and within countries that have adopted reforms, such as Spain.
Threadneedle Investments, meanwhile, has said it is cautious on equity prospects in 2015, with CIO Mark Burgess saying the firm was less positive than a year ago. Partly this is due to what Threadneedle called a “recovery-less recovery”, with Europe facing the prospect of outright deflation.
Like Anderson, Burgess has taken a favourable view on Japanese equities, with the country’s quantitative easing programme helping to boost corporate earnings via a weaker yen.
The aggregate net income at 195 of the largest listed Japanese firms are expected to expand by 10% to a record ¥17.5 trillion ($145 billion) this fiscal year, based on analyst estimates compiled by Bloomberg in November.
In addition, Burgess’s outlook is buoyed by a number of firms’ commitment to improve return on equity and national pension fund GPIF reallocating capital away from government bonds and into equities and alternative investments.
State Street has said investors may need to consider tilting their allocations towards countries with structural reform programmes in place and consider emerging-market small-cap stocks.
Asian countries that have set out reform agendas include India and Indonesia, both of which have retained investors’ confidence since ostensibly reformist governments were elected last year.
Anderson trumpets the potential reforms of Indian Prime Minister Narendra Modi and his ruling BJP party, such as foreign ownership of insurance firms. Late last month the Indian cabinet approved an executive order increasing the ownership ceiling to 49%, from the current limit of 26%. However, parliament must give its assent to the change within six months for it to be permanent.
Anderson still sees hope in the reform agenda of new Indonesian president Joko Widodo. Yet because his electoral win last July was so narrow, the situation there is "slightly less clear-cut [than India]” with a divided parliament and the lack of a clear reform mandate from the public.