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Despite uncertainties brought about by the U.S. threat of a military strike against Syria and a large tapering of U.S. bond purchase program, analysts believed that stocks are still the preferred areas for investment by international fund managers.
Financial markets around the globe have undergone wide swings in recent weeks due to looming military strike on Syria and talks of tapering monetary stimulus by the United States, with equities, currencies and bonds of emerging economies bearing the brunt of the sell-off. On Wednesday, however, the United States put on hold its plan to strike Syria with President Barack Obama saying that it will give way to a diplomatic solution to the chemical weapons issue involving Syria.
Nomura Research said given the current uncertainties, investors should still put their money selectively in stocks, as a combination of cyclically improving data in key economies and rotation from fixed income "safe havens" will continue to support risk assets such as equities. It recommended "overweight" position in developed continental Europe equities, as substantial policy- driven stabilization in sovereign debt and improving financial conditions should trigger an earning recovery, thus reducing the still-elevated equity risk premium. Nomura also retained Japan equities as a key "overweight" as substantial changes in the policy framework under "Abenomics" begin to get traction in the real economy. It added that Japanese stocks still look inexpensive and are still under-owned by both domestic and international institutions.
However, the Japanese research house maintained an "underweight " U.S. allocation recommendation, as U.S. corporate margin and earnings assumptions looked ambitiousparticularly as higher Treasury yields and corporate borrowing costs may erode historically high U.S. corporate profit margins, and resurgent U.S. dollar strength into end-year could impinge on overseas earnings.
While Nomura advised caution on expensive, commodity-dependent Latin American and socio-politically unstable Middle East and North Africa, it maintained an "overweight" position in emerging Asian markets where the combination of value and growth bodes well with the outlook of the equities in the region
Phillip Securities Research said with China's economic growth picking up, inflation remaining subdued, and valuations of listed companies coming to rock bottom, China equity is attractive at current level. It recommended long term "overweight" on Greater China stocks and upgraded its short-term "underweight" to " overweight" view to bring the call in line with improving near term fundamentals in China.
The research house also upgraded commodities to "overweight" position from "neutral", as latest purchasing managers' index figures confirmed growth is picking up from euro-zone, Japan and the United States to China that produces 75 percent of the world's manufacturing output.
In addition, U.S. dollar looked set to strengthen with U.S. economic growth improving, trade deficit and government budget deficit reducing. Indeed, the tapering of quantitative easing will confirm the favorable macro-conditions which will be good for the greenback but bad for gold. Therefore, Phillip Securities maintained "sell" recommendation on gold despite its sharp fall early this year.
As for bonds, Phillip Securities suggested further downside for U.S. treasuries in the face of stronger growth, and portfolio managers' preference for stocks over bonds. The likely U.S. tapering of bond purchase program also implies the largest buyer of U.S. treasuriesthe Federal Reservewill begin slowing down the pace of purchases down the road.
Such a move would signal the beginning of a steady withdrawal of monetary stimulus, probably to an outright stop by fourth quarter next year, said Phillip Securities.
