Winnie Lee, CIO at BNP Paribas Asset Management in Hong Kong, suggests conflicting investment data and the unquantifiable impact of terrorism and war makes speculating about prospects in 2002 a bit like English weather: a bit of cloud, some rain, later some sunshine. "There's a bit of everything," she says.
But there are a few simple things she can determine, and based on that, BNP Paribas believes local investors will be attracted to bonds and equity-linked products.
Even the certain things û that the United States, Europe and Japan are in recession û are not clear-cut. For example, Lee says one important indicator in the US is housing sales, an important part of consumption. It is slumping in certain regions and cities but not yet country-wide. Nor is it clear what will happen around the Christmas holiday; expectations for sales are quite low, and it remains to be seen whether the American consumer can surprise.
The biggest question concerns the dramatic interest rate cuts enacted by central banks around the world and the parallel fiscal stimuli governments are putting in place. Will it be enough to counter the universal bad news regarding corporate earnings? Lee says yes.
The US Federal Reserve Bank has cut interest rates 10 times in the past 12 months by a total of 425 basis points. Pre-September 11 cuts seemed to have boosted third-quarter earnings; the medicine was just taking hold when suicide hijackers toppled the Twin Towers. Since then even stronger medicine has been administered. Priming the pump will, Lee says, result in recovery, although it may remain anaemic and volatile for months, perhaps more, to come.
For BNP Paribas, this means acting with great caution: her equities team in Asia, for example, is concentrating on those companies that had already been restructuring, that have a strong market share and the right product, and a competent management. Usually this means chasing a handful of stocks with pricey valuations, but Lee says actually this crisis has made even the best companies relatively cheap.
Samsung Electronics, for example, is trading at a PE multiple of 10 times. Taiwanese companies are especially attractive because domestic problems compound the global downturn; leading high-tech companies have PE multiples in the low teens. BNP Paribas Asset Management has recently reduced its cash position from almost 10% to below 5% as a result.
Its fixed-income strategy has also been conservative, says Lee. Its bond funds are sticking with either sovereign names or corporate paper of the highest quality.
Glenn Trotman, director of business development, notes this year saw bonds perform well and equities perform atrociously. He believes the recovery means equities will do relatively better next year, but still carry risk. The firm is suggesting clients looking for some upside enter its Parvest Asian Convertible Bond Fund, which is a halfway house suitable for a murky environment.
"Convertible bonds are not well known among retail investors," Trotman says. But he believes this will become a popular product over the next 18 months. He adds this sort of thing is aimed at investors that already have some equities experience. For people new to mutual funds fleeing ultra-low deposit rates, a straight bond fund is more appropriate.