TheOnlyGayInTheVillage
29-05-12, 17:49
The Business Times © Singapore Press Holdings Limited.
Author: Genevieve Cua 26/5/2012
RENEWED fears of contagion arising from the potential exit of Greece - dubbed "Grexit" - from the eurozone have put markets in something of a panic mode.
Yet, even as analysts begin to make the eventuality of a Grexit a base case in their market forecasts, some expect markets to rebound from current levels before the end of the year. Hence, their advice: Don't panic; buy on weakness and keep portfolios balanced.
Most analysts dismiss the spectre of "Lehman II", citing cheap valuations as a cushion. Major markets based on the MSCI indices are in the red so far this year, pulled down in particular in the last couple of weeks as Greece's future has become more uncertain. The Asia ex-Japan index alone has fallen more than 10 per cent since the Greek elections on May 6.
EPFR Global has reported continued outflows from emerging markets and financial sector funds. Redemptions in the latter fund group hit levels last seen in Q4 2008. As for the emerging markets equity fund group, heavy redemptions have reduced year-to-date gains in terms of net flows from a high of 16.7 per cent in March to just 3 per cent as at the third week of May.
Here are some research highlights:
Citigroup Global Markets: In a May 26 report, Citi's economists have put the probability of a Greek exit from the euro at 50 to 75 per cent, even as "there are still many options available to policymakers" looking to contain the damage.
Citi equity strategists believe cheap valuations should limit the downside. "Equity sentiment indicators have just dropped back into 'panic' territory, confirming our suspicion that there is already a lot of bad news priced in ... Our targets are now suggesting a 20 per cent upside by end-2012. We would buy into weakness."
Global equities are currently trading at a price-to-book multiple of 1.5 times, which is already at last year's trough and 30 per cent below the 40-year average of 2.1 times, says Citi. The firm's Asia ex-Japan strategist Markus Rosgen believes the region is "fundamentally more immune" to the euro crisis than other emerging markets. But it remains vulnerable to eurozone disruptions. While all countries and sectors are expected to suffer in absolute terms, defensive sectors are likely to outperform.
Credit Suisse Research: Based on its May 21 report, the firm's central scenario is that there will be no Greek exit from the monetary union, and crisis containment will continue. The firm expects Asian currencies and equities to resume their upward trend in the second half when risk appetite should normalise. "We look for strategic entry point to add to Asian equities on further market setback. But we have shifted to a more defensive strategy to focus on domestic demand themes and high-yielding stocks to mitigate the global uncertainties."
Meanwhile, however, there is downside risk from current levels in the run-up to the Greek elections on June 17. Asian market volatility is expected to spike further. Credit Suisse points out that VIX volatility at the current level of 25 is still far from the extreme levels of May 2010 (45.8) and August 2011 (48). "This suggests near-term downside risk for Asian equities, which would in turn negatively impact Asian currencies." But it also adds that Asia's resilient domestic fundamentals, robust fiscal strength and policy flexibility underpin its "constructive" strategic views on the region despite short-term uncertainties.
Blackrock Investment Institute: The firm believes Grexit is not a given as polls show Greeks overwhelmingly want to remain in the monetary union. It tells investors to "balance investing in risk assets for the long run with guarding against short-term price declines". Investors, it adds, could consider using out-of-the-money calls to capture a sudden risk rally. "Investor positioning is bearish, especially for equities, upping the chances of a snap-back."
While the firm prefers top-quality multinationals, it says this is a crowded trade. It is looking to buy financials, dividend payers and domestically focused European companies when valuations hit bottom. It expects emerging markets and US assets to outperform.
Schroders: Head of asset allocation Robert Farago's baseline scenario is that Greece exits the euro but other countries remain within the single currency. He expects that the stress would trigger at least one more round of measures or burst of liquidity.
"The money flowing out of the banking system of Greece, Spain and very possibly beyond, means that the authorities need to act fast. Whether sufficient liquidity is provided to calm markets remains unclear.
"We must accept that the outcome is impossible to predict and construct our portfolios in such a way as to avoid disaster for our investors even if the authorities in Europe cannot do the same for their populations."
Coutts: Chief investment officer (Europe) Norman Villamin writes that while some commentators suggest a 100 per cent risk of Greece leaving the eurozone over the next 12 months, "we still see this as a more balanced and nuanced risk". "Compromise and eventual return to an anxious stability is our base case," he adds.
Investor cautiousness will result in an increased pursuit of yield, he says, favouring corporate debt and high dividend equities globally.
JP Morgan Asset Management: Geoff Lewis, the firm's global market strategist, believes there is a relatively high likelihood that the June 17 elections in Greece would result in a government led by the radical left party Syriza. While an anti-austerity Syriza government would lift the likelihood of an exit, he reckons the government would not choose to leave the monetary union. "We remain of the view that the costs of exiting the eurozone for Greece are high enough to prevent such exit from occurring as a deliberate policy choice ... If a Greek exit does occur, it will be because the country has been pushed out by the rest of the region."
He tells investors to stay diversified. "We believe the most logical strategy for now is to keep portfolios well-balanced and well-diversified. For investors looking for longer-term investments and are willing to accept greater risks, this could be a moment to buy on dips to take advantage of cheap valuations."
Author: Genevieve Cua 26/5/2012
RENEWED fears of contagion arising from the potential exit of Greece - dubbed "Grexit" - from the eurozone have put markets in something of a panic mode.
Yet, even as analysts begin to make the eventuality of a Grexit a base case in their market forecasts, some expect markets to rebound from current levels before the end of the year. Hence, their advice: Don't panic; buy on weakness and keep portfolios balanced.
Most analysts dismiss the spectre of "Lehman II", citing cheap valuations as a cushion. Major markets based on the MSCI indices are in the red so far this year, pulled down in particular in the last couple of weeks as Greece's future has become more uncertain. The Asia ex-Japan index alone has fallen more than 10 per cent since the Greek elections on May 6.
EPFR Global has reported continued outflows from emerging markets and financial sector funds. Redemptions in the latter fund group hit levels last seen in Q4 2008. As for the emerging markets equity fund group, heavy redemptions have reduced year-to-date gains in terms of net flows from a high of 16.7 per cent in March to just 3 per cent as at the third week of May.
Here are some research highlights:
Citigroup Global Markets: In a May 26 report, Citi's economists have put the probability of a Greek exit from the euro at 50 to 75 per cent, even as "there are still many options available to policymakers" looking to contain the damage.
Citi equity strategists believe cheap valuations should limit the downside. "Equity sentiment indicators have just dropped back into 'panic' territory, confirming our suspicion that there is already a lot of bad news priced in ... Our targets are now suggesting a 20 per cent upside by end-2012. We would buy into weakness."
Global equities are currently trading at a price-to-book multiple of 1.5 times, which is already at last year's trough and 30 per cent below the 40-year average of 2.1 times, says Citi. The firm's Asia ex-Japan strategist Markus Rosgen believes the region is "fundamentally more immune" to the euro crisis than other emerging markets. But it remains vulnerable to eurozone disruptions. While all countries and sectors are expected to suffer in absolute terms, defensive sectors are likely to outperform.
Credit Suisse Research: Based on its May 21 report, the firm's central scenario is that there will be no Greek exit from the monetary union, and crisis containment will continue. The firm expects Asian currencies and equities to resume their upward trend in the second half when risk appetite should normalise. "We look for strategic entry point to add to Asian equities on further market setback. But we have shifted to a more defensive strategy to focus on domestic demand themes and high-yielding stocks to mitigate the global uncertainties."
Meanwhile, however, there is downside risk from current levels in the run-up to the Greek elections on June 17. Asian market volatility is expected to spike further. Credit Suisse points out that VIX volatility at the current level of 25 is still far from the extreme levels of May 2010 (45.8) and August 2011 (48). "This suggests near-term downside risk for Asian equities, which would in turn negatively impact Asian currencies." But it also adds that Asia's resilient domestic fundamentals, robust fiscal strength and policy flexibility underpin its "constructive" strategic views on the region despite short-term uncertainties.
Blackrock Investment Institute: The firm believes Grexit is not a given as polls show Greeks overwhelmingly want to remain in the monetary union. It tells investors to "balance investing in risk assets for the long run with guarding against short-term price declines". Investors, it adds, could consider using out-of-the-money calls to capture a sudden risk rally. "Investor positioning is bearish, especially for equities, upping the chances of a snap-back."
While the firm prefers top-quality multinationals, it says this is a crowded trade. It is looking to buy financials, dividend payers and domestically focused European companies when valuations hit bottom. It expects emerging markets and US assets to outperform.
Schroders: Head of asset allocation Robert Farago's baseline scenario is that Greece exits the euro but other countries remain within the single currency. He expects that the stress would trigger at least one more round of measures or burst of liquidity.
"The money flowing out of the banking system of Greece, Spain and very possibly beyond, means that the authorities need to act fast. Whether sufficient liquidity is provided to calm markets remains unclear.
"We must accept that the outcome is impossible to predict and construct our portfolios in such a way as to avoid disaster for our investors even if the authorities in Europe cannot do the same for their populations."
Coutts: Chief investment officer (Europe) Norman Villamin writes that while some commentators suggest a 100 per cent risk of Greece leaving the eurozone over the next 12 months, "we still see this as a more balanced and nuanced risk". "Compromise and eventual return to an anxious stability is our base case," he adds.
Investor cautiousness will result in an increased pursuit of yield, he says, favouring corporate debt and high dividend equities globally.
JP Morgan Asset Management: Geoff Lewis, the firm's global market strategist, believes there is a relatively high likelihood that the June 17 elections in Greece would result in a government led by the radical left party Syriza. While an anti-austerity Syriza government would lift the likelihood of an exit, he reckons the government would not choose to leave the monetary union. "We remain of the view that the costs of exiting the eurozone for Greece are high enough to prevent such exit from occurring as a deliberate policy choice ... If a Greek exit does occur, it will be because the country has been pushed out by the rest of the region."
He tells investors to stay diversified. "We believe the most logical strategy for now is to keep portfolios well-balanced and well-diversified. For investors looking for longer-term investments and are willing to accept greater risks, this could be a moment to buy on dips to take advantage of cheap valuations."