A two-century-old British pensions and insurance provider sees a strong outlook for Asia’s equity markets and macroeconomic environment. Elsewhere, the outlook is mixed.
Asia is looking robust, with an average of 5 percent to 6 percent growth in gross domestic product across the region, Colin Tipping, group investment officer at Friends Life, told EJ Insight.
This is despite possible risks such as uncertainty over the pace of interest rate increases in the United States next year.
Favorable economic data will help drive performance in the markets, particularly equity markets, which will take note of what’s going on at the macro level and what corporate earnings are doing, Tipping said.
“The story we hear from our fund managers is that the [Asian] economy is robust. There are some risks in it, and that’s mostly about how quickly interest rates rise … there are little pockets of potential inflation issues,” he said.
Tipping said there are definitely opportunities in Asia’s attractive equity markets, although they are not super cheap at the moment in terms of valuation.
“Most managers remain positive on the region,” he said. “They are investing more on a sector and company level rather than just taking a broad exposure to the market.”
Consumer discretionary stocks are the firm’s top picks, in sectors such as retail, electronics and automobiles across Asia.
Biotechnology and health care are also good bets, as Asia’s population is aging, Tipping said.
Meanwhile, in the west, “it’s a tricky environment”, he said. “Certainly in the developed world, you’re seeing economies moving at different speeds.”
While the US Federal Reserve has begun to tighten policy by finally ending its historic quantitative easing program in October in the light of strong growth in employment and economic data, the European Central Bank surprised the financial markets by cutting interest rates in September in an effort to stave off deflation.
“The US is on a good trajectory, and we’ve seen this reflected through the GDP and employment numbers,” said Tipping. “All the signs are there of a boom market, in the sense that you’re seeing a lot of merger and acquisition activity.”
There is a lot of corporate cash sitting on balance sheets available for shareholders and capital investments, he said.
But the economic outlook in Europe is a different picture, especially as southern Europe continues to suffer, Tipping said.
Japan’s central bank also shocked the global financial markets in late October by expanding its asset purchases to fight deflation. The Bank of Japan said it would increase its asset buying program to 80 trillion yen (US$671 billion) a year, up from the previous rate of 60-70 trillion yen.
Tipping said Japan’s firms and equity market can benefit from the huge amount of liquidity only if the government can successfully raise wages and create more disposable income in the economy.
“People will save less and spend more, therefore companies will benefit and the equity market will benefit,” he said. “Ultimately it comes down to quite a simple relationship … disposable income in the economy driving the equity market.”
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