“The only thing we have to fear is fear itself.”
Those were the immortal words Franklin D. Roosevelt spoke during his inauguration as the 32nd president of the United States in March 1933, when the nation was gripped by the Great Depression.
Those words have been used time and again to soothe the feelings of global investors who are prone to panic amid the market turmoil.
As we’ve noted before, China’s economy will go through a bumpy year in 2016. The complexity of the market has exceeded our expectations. Nevertheless, we feel the market has overreacted.
Market jitters about the growth outlook are totally justified. They are worried about the renminbi’s devaluation, the debt crisis in Europe as well as the recession risk in the US.
Such negative sentiments may not fade away until the Chinese government has curbed capital outflow and reversed expectations for a weaker yuan.
In the meantime, the latest US economic figures are disappointing. Still, property and job markets are quite resilient, and lower household debt will benefit consumption.
It is unlikely for the US economy to slip into recession.
Major central banks have adopted further monetary easing measures. Last week ECB president Mario Draghi announced he was expanding the quantitative easing program as well as lowering deposit rates.
Also, the Bank of Japan may further relax its monetary policy to achieve its inflation target after imposing negative interest rate.
The Federal Reserve, the only central bank that is in the tightening cycle, may halt the rate normalization process.
We believe the Fed may raise rates for no more than twice in the second half of this year, at 0.25 percent each time. And the 10-year Treasury yield may reach 2.2 percent at the end of the year.
However, Asia excluding Japan may see falling interest rates, and seven central banks in Asia may either keep rates unchanged or cut rates.
A slower US rate hike means Hong Kong and Singapore may also see slower rate increases. The three-month interbank rate is unlikely to hit over 2 percent within the next 12 months.
In China, the benchmark deposit rate may slide to 1 percent this year. The Chinese central bank may have room to cut the reserve requirement ratio (RRR) by another 250 to 450 basis points after a 50bp reduction in late February.
Lackluster global economic growth can be seen in Asia’s trading numbers. Asia has reported a year-on-year drop in all of its major export markets in January.
However, we believe it won’t affect our investment theme in the region. Investors should increase their holding of quality stocks with low valuation but stable dividend payouts.
Also, Asia’s credit bond market has been very stable except for the energy and high-yield segments. The average credit spread has dropped to 320bp, far below the peak of 800bp in 2008 and 2009.
By contrast, Asia equities have been sluggish, and posted a drop of 18 percent last year.
Currently, the price-to-book of Asia stocks is around 1.2 times, close to the level during the Asian financial crisis.
However, we believe there will be a 5 percent earnings growth, and return on equity will remain stable. Investors can still find investment opportunities amid an overly pessimistic market sentiment.
High-dividend stocks, those that can keep paying dividends through different economic cycles, will outperform this year.
REITs in Singapore and Hong Kong, banks in Singapore and China, as well as industry leaders in the transport and telecom sectors are recommended.
Also, investors should avoid stocks that are too sensitive to economic cycles, like energy and manufacturing.
This article appeared in the Hong Kong Economic Journal on March 16.
Translation by Julie Zhu
[Chinese version 中文版]
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