Julius Baer research head sees opportunities in US, SE Asia

Mark Matthews shares his views on the state of the global economy and where to invest your money.
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Mark Matthews, Julius Baer</div>
<div style="text-align: left;"> Mark Matthews, Julius Baer</div>

Mark Matthews is head of research for Asia at Bank Julius Baer & Co, based in Singapore. He has 19 years of experience in finance and investment, and has held senior research and sales positions in various financial institutions. On a trip to Hong Kong this week, he sat down with FinanceAsia for a chat about investment opportunities and the outlook for the global economy.

How do you see the situation in Europe?
To my mind, the narrative is changing slowly and in a good way. I think over the next six to 12 months, we’ll see a lot of changes in both Germany and the southern countries (in Europe). If I had to choose one driver of this gradual change in narrative, I think it’s actually originating in Germany. For historical reasons, they had a pre-occupation with inflation, and they were dead-set on forcing austerity on the rest of the region. But at some point, and I don’t know when exactly, I think they realised that if they really follow through on forcing such austerity on the rest of Europe, a lot of their customers will be destroyed because a lot of them are based in the rest of Europe. Europe is definitely its largest trading partner.

Six months ago, it would have been political suicide for (German chancellor Angela) Merkel to soften her stance on Greece, for example, but she is. Every day I read a quote from Merkel and it gets more and more supportive of the rest of Europe. You still have people saying opposite things. But what’s going on in Europe is that the narrative is slowly shifting from austerity, and that’s why the euro is not collapsing anymore. Of course, European economies are still in recession, and I think it’s somewhat worrisome that Germany’s new orders last week were down quite a lot.

And the state of the global markets?
Actually, markets have been up this year. The US is up about 14%, and world stocks are up about 10%. We all think it’s a terrible bear market, but actually stocks have been doing quite well. Spain is down, China is down, but most markets are up. Even Germany is up about 15%. So I think that the news is actually masking very nice returns in stocks. But most people get scared because they watch the news, and they sell and end up not making any money. Hedge funds have had a much worse performance than indices so far this year.

Which are your favourite markets?
I like the US. It’s one of my favourite places. Most interesting, I think, is what’s been going on in the property market. New homes available for sale in the market are at 142,000, which is an all-time low since records began in 1963. Based on the current sales trajectory, those 142,000 homes will all be sold within four months. And building permits are picking up. Because there are no new homes on the market, you have to build more. If you exclude foreclosures, because foreclosures are cheap, there’s also been a quite significant pick-up (in home prices). The recovery in the housing market is most interesting.

There’s been kind of a hiatus since 2006 – many people haven’t been buying properties because they can’t get mortgages. That’s quite a long time. So a lot of people have gotten married and had kids etcetera and would like to buy new homes.

I also like Southeast Asia. The Southeast Asian markets have, bizarrely, offered kind of a safe haven quality. It is bizarre because 10 years ago they were the pariahs. Everybody was interested in China and India, and no one wanted to talk about Thailand or the Philippines. But last year, even though we had the European crisis and most markets in Asia were down, these markets were up. Thailand would have been up, too, but they had big floods. So far this year, these markets have been doing very well.

I really like them. However, I don’t think they’ll repeat this performance in the second half. I like them as a good long-term investment, but I wouldn’t buy the Philippines, expecting it to go up another 24% in the next six months. That’s just not realistic. But in the longer-term, they have a very good structural story, and each one is actually a little bit different.

With Thailand, what makes it unique is its position on the map. It’s actually the centre of Southeast Asia — not Singapore, but Bangkok. All these countries — Myanmar, Laos, Cambodia, Vietnam — are opening up and there’s a lot more trade going on inter-regionally. Thailand is interesting because it’s got a whole new emerging market universe, which has just opened up, all around it. The return-on-equity in Thailand is also very high — the second-highest in Asia. This year, it’s got the second-highest growth in Asia in EPS (earnings per share) terms, and next year it should have the highest.

In the Philippines, what’s unique is its population. It’s got the youngest population in Asia, even younger than in India. Looking at the age pyramid, most people in China are now in their 30s and 40s, but by 2050 they’re going to be in their 60s. That’s not very good. In the Philippines, the largest segment of the population is babies (0-4 years old). What that means, although you can’t precisely know, is that the population, which is about 100 million now, is going to double in the next 30 or 40 years. And that means the country will get a lot more stuff done, more consumption.

Another unique thing about the Philippines is that they are poor, but they speak English. About 12 million of them are living overseas now. As the population increases, more people will go overseas. Ten years ago, Filipinos were sending about half a billion dollars a month back home, and now it’s about $1.8 billion. As that goes up, the Philippines will become a wealthier nation. In November 2010, its external reserves exceeded the external debts.

They also have something called BPO, or business process outsourcing. This is growing 25% per year and within four or five years should be about the same size as remittances (from overseas Filipinos). Those are pretty powerful drivers for the economy.

Those are two countries that I like, but they’ve done well. So I’m not saying that you want to buy them now to make money in the next six months. But if you want to make an investment on a five-year view, these will be good places to do it.

I like Indonesia, but probably not as much as the others. You’ll have to be picking companies. Indonesia has gone up almost 1,000% in the past five years, so people wonder how it could possibly do better than that. But I think it can continue to do quite well. There’s a lot of growth left in the consumer sector and the banking sector. It’s a big country, and it’s growing. Companies are generally quite well run.

The other thing that I think is noteworthy is the high-yield bond market. In Asia, we like companies such as Indosat Palapa, Zijin International Finance, Abu Dhabi National Energy, Dubai Electricity and Water Authority and PTTEP. These are all mostly quasi-government companies, and that gives us some degree of assurance that they will repay (their bonds).

What kinds of stocks do you like in the US?
On a six-month view, I feel safer and more comfortable talking about US blue-chip names because they haven’t gone up 30% so far this year. Quality US blue-chips, which are leaders in their products on a global level, have a history of treating minority shareholders well and have strong balance sheets. They are a good place to invest.

I really like Walt Disney, for example. Its theme parks are doing really well as the US economy recovers, and the movies are also doing really well. As the global culture digitalises, we increasingly watch more on the internet. And these kinds of companies are well placed to get much broader global audiences as well. Young people generally like to wear Nikes, eat hamburgers and watch movies from Walt Disney, and so on.

The US economy is moving in the right direction, and if they get QE3 (a third phase of quantitative easing), that will give it a further boost. I don’t think it’s necessary, but maybe they will.

What is your view on the world market in the coming year?
I think equities are risky, that’s for sure. To use Asia as an example, if you compare high-yield bonds versus stocks in the past eight years or four years or even just two years, bonds have actually given you better returns with less risk, and I think that will continue to be the case. But we want to choose our bonds carefully, just as we choose our stocks carefully. So high-grade high-yield bonds are, I think, the way to go.

As for equities, I think underneath a policy-driven news flow, there’s actually a very quiet upward trend in stocks. I feel not too bad about things.

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