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5. Inflation to be relatively benign in 2012. In 2011, inflation in Asian economies has been driven by sizable gains in oil, food and property prices. From the relatively elevated levels of 2011, commodity price gains are not likely rise by a similar magnitude (especially considering the slower economic growth anticipated), which should allow for more benign inflation in the region. More targeted policy responses in the housing market in countries like China, Singapore and Hong Kong may help to moderate property price gains, easing headline inflation further. 6. Monetary tightening to turn accommodative. As growth fears take precedence over inflationary concerns, we expect most Central Banks (and not just the PBOC) to embark on a more accommodative monetary policy stance, as opposed to further tightening measures seen in 2010 and early 2011. Central bankers in Australia, Brazil and Indonesia have already cut rates in 2011, while others like South Korea and Malaysia have recently left rates on hold. Accommodative monetary policy will help reduce downside risks to growth, but may also weigh on currency appreciation expectations for EM currencies. While purchasing power parity suggests a long-term trend of appreciation for EM currencies against the USD, there are near-term risks should monetary policy in EM countries ease more than anticipated. 7. Politics - both a risk and opportunity in 2012. 2012 will see a flurry of elections; notably, the presidential election will be held in the US. In an attempt to slash government spending, sectors like healthcare and defence are likely candidates to experience some negative impact from new government budgets, while potential tax breaks may see easier (and cheaper) repatriation of overseas capital for US companies, which could be used for dividend payouts or share-buybacks. Pro-economic policies are likely to be formulated across various countries, while electorate-friendly measures may provide a boost to household spending. 8. Bubble formation? But where are the excesses? We believe that a long-term build-up of excesses often signals problems in a particular sector, country or asset class. While we do not observe that in the corporate sector at present, government debt levels are relatively high in developed economies, the very same debt securities which investors are plying into at record-low yield levels. In addition to developed sovereign debt, gold appears to share the same characteristics, having risen for 11 consecutive years even as demand has been relatively muted in recent times.
supportive valuations coupled with a shift towards more accommodative monetary policy, we think China equities are poised to deliver extremely strong returns from their current levels. The OSK-UOB Big Cap China Enterprise Fund focuses on China companies while the Manulife Investment - China Value Fund has a strong track record investing in the Greater China region, which comprises China, Hong Kong and Taiwan. 4. European equities volatile, but remain cheap and necessary for portfolio diversification. Europe has been a constant source of worry for most investors, and given that the situation remains fluid, we anticipate significant volatility in European stocks. Our valuation approach for European equities takes into account a forecasted mild recession in 2012 and its corresponding negative impact on profits. Nevertheless, even on our conservative estimates, European equities remain attractive despite our recent downgrade, and we deem exposure to the regions equity market necessary for portfolio diversification. The TA European Equity Fund offers exposure to European-based companies which also derive a substantial portion of revenue from outside Europe. 5. Indonesian equities least favoured, following three consecutive strong years. With its relatively shielded economy, Indonesia appears to have found favour with investors in recent years. Nevertheless, valuations for Indonesian equities are fair at best following three strong years of performance, and the market is less attractive compared against other markets as well as taking into consideration the high domestic government bond yields. 6. Riskier fixed income segments more attractive. Even as fixed income has generally fared well in 2011, riskier segments like high yield bonds have been negatively impacted by heightened risk aversion. The Asian high yield space now offers some of the highest yields within fixed income, while spreads in the US high yield space have also risen. Yields on emerging market debt remain high relative to developed sovereign debt, and investors may benefit from a potential convergence in yields between developed and developing market debt. The AmEmerging Markets Bond is our recommended fund in this area. 7. Underweight developed sovereign debt. While our expectations of moderating growth and inflation are generally supportive conditions for developed sovereign debt, G7 sovereign yields remain at some of the lowest levels on record, a manifestation of investor risk aversion. Yields on developed sovereign bonds now offer too little to compensate investors for interest rate and potential inflationary risk, and also represent extremely poor long-term returns. 8. Avoid gold. Gold has continued to surprise us with strong gains in 2011, which should cap eleven consecutive years of gains. Gold bulls point to large sovereign debts and deficits to make their case for the shiny yellow metal, and also talk about its inflation-hedging properties. Even so, global demand for gold in 3Q 11 rose a paltry 5.5% year-on-year in volume terms (according to the World Gold Council) while jewellery demand actually fell 10% year-on-year. On the other hand, prices rose by 24.1% (in USD terms) over the same period, highlighting a clear disregard for supply and demand factors. Investors should be cautious on gold (which does not get destroyed over time, but rather, is recycled) and would urge investors not to time the peak, hoping to exit before the house of cards eventually collapses.
The Research Team is part of iFAST Capital Sdn Bhd
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