Citigroup economist Markus Rosgen argues that in 2007 value is finally going to beat momentum in the market. He notes that for the past 29 months, momentum has clearly won out over value. ôSo much so, that momoÆs out-performance is now close to being a two standard deviation event and is within a hairÆs-width of the all-time record set in January 1998,ö writes Rosgen in a research report he distributed last week along with strong coffee and muffins, which sadly works in getting journalists to show up for morning meetings.
His point (bolstered by and co-credited to Paul Chanin, head of Asian quants research for Citi) is that historically investors have turned to value over momentum when two things happen: thereÆs been a slowdown in GDP growth and a rise in stockmarket volatility.
Now if you predict, as Citi is, that GDP growth will slow and volatility will rise, then youÆre going to want to avoid crowded markets that have been trading on momentum and instead hunt for value. Citi's read: ThatÆs a thumbs down for India, which has been riding a strong wave of momo. But itÆs a thumbs up for Korea, which enjoys favourable valuations.
Down to brass tacks on Korea, hereÆs the thinking: Citi expects Korean stocksÆ return on equity will hold flat at 13.7% net year, so that indicates the upside will be limited to about 10% for the KOSPI in the first half of the year. The ROE improvements will be down to higher sales rather than wider margins. The positive sectors: Internet, tech, securities, telecoms, construction and insurance û though Citi warns off investments in banking, steel, shipping and consumer sectors.
MacquarieÆs Tim Rocks is also bullish on Korea. He reckons once global growth starts to recover, Korea (and then Taiwan) will take centre stage.
One of the reasons Rocks favours Korea is simply because investors have been more underweight Korea than they have been since the Asian financial crisis. The reason: concerns about labour protests, riots, scandals and lawsuits involving foreign investors and a notion that xenophobia is on the rise.
Rocks in his ill-named Rocks on Stocks November 9 report points out that foreigners sold $8 billion worth of Korean stock in the third quarter of 2006, following on from $4 billion in the second quarter -- pushing the underweight position down. Rocks is gambling on history. After the financial crisis, investors moved to cover the underweight position through 1999, and the Kospi almost doubled. Could we see a repeat?
Credit Suisse may have most succinctly (and safely) phrased it when its analysts wrote in their December 11 research report ôWith the valuation discount opening again and foreigners underweight, it is tough to bet aggressively against Koreaö. (Though Credit Suisse merely raises its stance on Korea to market weight, after a year of de-rating.)
Following on the momo vs. value argument, Credit Suisse, warns that investors should be cautious on India and China. ôWe remain very cautious on the two most popular markets in the region û India and China û primarily because of valuation concerns in the case of China and in India because of the resumption of an investment cycle at a time when valuations are stretched and the external account potentially precariousö write its analysts in their Asia Pacific Strategy 2007 Panorama report.
Obviously, the overwhelming advice from all the banks on the two big darlings for equities investors (and FDI) is to be selective in your investment.
As for macro economic outlooks, Lehman Brothers sums up a view echoed by several other bankers in the region. Next year, expect oil prices to rise back up above $70 a barrel, which should cause global demand to weaken, which in turn will cause Asia ex-JapanÆs exports growth to turn down û possibly sharply. But the good news is that domestic policies could loosen. Its forecast: aggregate GDP growth in the region will slow, but only moderately to about 7%.
However, some bankers are more bullish - even giving a nod to Southeast Asia again. JPMorgan predicts an Asean comeback, with GDP actually accelerating in Thailand, Indonesia and the Philippines.
Deutsche BankÆs Sanjeev Sanyal also argues that IndonesiaÆs growth will accelerate next year. He reckons that the public debt-to-GDP ratio will fall below 40% in 2007 and the government will be in a position to take advantage of low interest rates to borrow and invest in infrastructure. While thatÆs clearly needed, many Indo watchers have been sceptical that projects would ever get off the ground. But Sanyal argues that the nationÆs experience of rebuilding Aceh and other disaster-affected areas has had the effect of smoothing the way for other infrastructure projects that have hitherto been bogged down by procedural delays. So, next year, look for more such spending, opening the door for investment.
Predictably, Hong Kong is still getting favourable reviews thanks to its proximity to China. The financial market is expected to continue to boom due to global investorsÆ keen interest in China û even if some bankers are warning off continuing to pour all your money into the China basket. And Singapore continues to show signs of smooth sailing thanks to its ôgrow as fast as we canö philosophy.
Another predictable forecast: all the banks are offering up warnings. A US housing market slowdown could have a knock-on affect, so could soaring oil prices or war in the Middle East. Perhaps the most worrying, for its capriciousness, bird Flu made the rounds on a number of lists û higher up than it did on last yearÆs warnings.
And that reminds us at FinanceAsia: We wish you all a healthy new year.