The Greek vote in favour of implementing the strict austerity measures and the agreements struck in Europe to minimise the impact of the failing Greek economy have reassured investors globally. Stock market confidence had weakened during the latest phase of the European sovereign debt crisis and was further hurt by some weak economic data from the US in June and continued concerns over inflation in China, India and other emerging economies.
According to RCM, the MPF and retirement fund investment specialist, Asian regional stock markets will continue to be sensitive to these macro factors through the summer but can look forward to improved conditions later in the third quarter and to the end of the year.
“The summer in Asia is traditionally a period when stock market turnover is slow and earnings estimates are reviewed and often cut – this year is a good example of these behaviours,” explained Dr. Mark Konyn, CEO RCM Asia Pacific.
As a result of these conditions RCM has been positioning portfolios for retirement investors slightly more defensively going into the summer period and has reduced positions held previously in cyclical industries. An example of this repositioning is the reduction in energy related stocks to take account of the previously strong performance of the oil price that is likely now to face a period of relative stability and possible easing as some of the supply-side concerns ease. An exception to this is in the materials sub-sector where demand remains strong and supply tight.
On inflation RCM maintains that accelerating food prices are likely to stabilize and that this will ease conditions particularly in Mainland China and elsewhere in emerging economies. As a result, and echoing comments made by Premier Wen whilst on his visit to the UK recently, overall inflation will stabilise implying that the tightening cycle is close to its current peak in China although interest rates may move up a little further.
“Whilst we do not anticipate a reversal in monetary policy in China, an end to the current tightening cycle will help investors build confidence. However the policy tightening has further to go in India, and this could depress the Indian stock market for longer.” Dr. Konyn explained.
Commenting on the end to the current policy of quantitative easing (QE) in the US, Dr. Konyn explained that unlike the situation previously in Japan when similar policy easing ended and Japanese bond yields increased substantially, the US has taken a more gradual approach whilst keeping options open to commence the program at a later date. Consequently the immediate impact on both bonds and stocks has not been a significant drag on confidence.
For MPF and other retirement investors in Hong Kong the year so far has been lacklustre from a performance perspective with a typical balanced or multi-asset portfolio registering a 3% increase from the end of last year.
“Viewed in context of rising inflation here in Hong Kong, investors will be expecting a more robust second half to the year.” Dr. Konyn said.
“Although we expect to see company earnings expectations reduced through the remainder of the summer, valuations are not particularly expensive and stock markets are positioned for better performance later in the year with much of the bad news relating to global macro issues already factored into current prices,” he added.