Wednesday July 23, 06:20 PM
FUND VIEW - Don't be fooled by summer rally, JF Asset says |
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By Kevin Plumberg
HONG KONG (Reuters) - Beaten-down equity markets have room to rally this summer based on attractive valuations but be prepared for the possibility of deflation hitting major economies in 2009, an executive with JF Asset Management said on Wednesday.
Grim economic conditions in the UK, the euro zone and the United States will almost certainly get worse next year as delinquencies rise on credit card debt, auto loans and virtually every other type of credit, Geoff Lewis, head of investment services at JF Asset Management, told a media briefing in Hong Kong.
Investors should use the current global rise in equity prices -- and fall in oil prices -- to sell off unwanted risk in their portfolios and get selective in Asian investments.
"If oil were to come down sharply to $100 a barrel, you would get a hell of a relief rally. That would be a great time to cut your positions, reduce exposure to equities and get ready for the next stage of the deleveraging process and the next stage of the credit crunch-driven recession which is certainly going to the U.S. and Europe," Lewis said.
Crude prices have tumbled more than $20 from an all-time high of $147.27 a barrel hit two weeks ago, easing some pressure on consumers and company profit margins and helping to push up the MSCI all-country world share index 4.5 percent in the last week.
Inflation is increasingly dominating headlines worldwide, but will not be a long-term problem in Asia, let alone the United States or Europe, Lewis said, noting global growth is expected to remain below trend for the forseeable future.
Actually, deflationary forces could be unleashed when both the U.S. and European economies succumb to recessions and consumer demand dives, he said.
In that respect, Lewis sees a high risk for more downward revisions to corporate earnings.
"In the last three recessions, earnings have fallen by 32 percent but globally they have been marked down by about 10 percent so far," he said.
For now, JF Asset, part of JPMorgan Asset Management, is overweight U.S. large cap firms and Japan equities based mostly on low valuations. It is underweight emerging markets, U.S. small caps and Europe.
NEUTRAL ON ASIA; POSITIVE ON CHINA, INDIA
Funds managed by the firm include the non-Japan Asia-focused JF Eastern fund, which had $478 million in assets at the end of June, down 30 percent since the start of the year, according to Lipper, a Thomson Reuters company.
The benchmark MSCI Asia-Pacific ex-Japan index is down 19 percent so far this year, after posting its worst first-half performance since 1992.
The JF Eastern fund returned 41.64 percent last year, beating the 36.49 percent rise in the benchmark, according to Lipper. However, it has underperformed the benchmark by around 5 percentage points so far this year.
The firm is currently neutral on the Asia-Pacific outside of Japan in its portfolio but sees opportunities in China's infrastructure and coal industries as well as India's market.
Its top holdings in the region include Samsung Electronics Co Ltd, China Mobile, Reliance Industries Ltd, China Construction Bank Corp and Kookmin Bank.
Lewis was optimistic about Asia's growth prospects over the next two to three years as long as central banks in the region don't tighten monetary policy too much to contain inflation.
Certainly, though, Asia's relative growth prospects exceed those of the U.S. and Europe.
"People haven't really realised how much the tightening of credit standards and the weakness and shortage of capital at banks is actually going to impair growth. It's only just beginning," he said.
JF Asset Management had about $110 billion in assets under management at the end of March, compared with $1.2 trillion for JPMorgan Asset Management as a whole.
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