Investors should invest in export-oriented sectors in the European and Japanese equity markets to take advantage of looser monetary policy and a weaker currency, respectively, according British banking and financial services group Barclays.
Some sectors naturally benefit from a weaker currency, especially those with multinational exposure such as autos, industrials and financials, managing director Benjamin Yeo said.
He said stock prices in Europe and Japan have come off several rounds of valuations and are now at very attractive levels.
“Valuation is so cheap we think that at the end of the day, there is a good chance the bounce in stock prices is going to offset any further decline in currency,” Yeo said.
Barclays vice president James Cheo said currencies will weaken or strengthen against each other, depending on how much individual central banks ease their policies versus those that are tightening theirs.
“Because of the currency implications, when we say invest in Europe and Japan, we are advising our clients to hedge out the currency risk,” Cheo said.
“In that perspective, they don’t lose if the euro depreciates… or they don’t lose that much in Japanese stocks if the yen is to depreciate further.”
Last week, the European Central Bank announced an aggressive bond-buying program, promising to flood the eurozone with more than €1 trillion (US$1.16 trillion) until September 2016.
It has sparked a rally in stock and bond markets while the euro weakened to 11-year lows.
In October, Japan scaled up asset purchases to fight deflation, with the Bank of Japan saying it would increase its asset buying program to 80 trillion yen (US$671 billion) a year, up from the previous rate 60-70 trillion yen.
Under quantitative easing (QE), central banks create new bank reserves to buy assets from banks and other financial institutions that can in turn use the money to extend new credit to households and businesses.
Such expansionary monetary policies usually weaken the national currency, which in turn boosts exports.
Upbeat on China
The Chinese equity market is a good bet for the first half of 2015, with the top picks being financials, property, consumption and discretionary sectors, Cheo said.
However, he said investors are not too confident about the Chinese equity market, reflecting its low valuation. But in the long run, as policymakers show more results in their reform, the confidence level will pick up and will lead to re-rating of Chinese equities.
Meanwhile, Yeo said if the mainland bubble was to burst, it would have happened already.
In 2010, China was grappling with growing shadow banking activities and real estate excesses while inflation was running at about 5 to 7 percent.
It meant monetary policy could not be loosened, he said.
“Historically at any period of bubble, once the bad news surfaces, within the next 18 to 24 months, the bubble bursts into a full-blown crisis and the market collapses,” Yeo said.
“We’re already five years into it. Yet, we have not seen the collapse of the real estate market or the banking sector,” he said.
Yeo said Europe’s sovereign debt crisis emerged in 2009 and by 2010 it had become full-blown. The US subprime meltdown appeared in 2007 and by 2009 the market had collapsed.
He said Chinese policymakers are strategically minded.
They are managing a sustainable growth rate and pursuing structural reform while identifying new growth drivers, he said.
Low inflation is giving them a lot of flexibility to manage the economy. The central bank could lower interest rates to boost liquidity in the market, he said.
– Contact us at [email protected]