Q&A with Stephen Corry
Merrill Lynch, Chief Investment Strategist for Global Wealth Management

Some investment houses are of the view that emerging markets such as Asia could still see downside of 20% to 25%. A recent Merrill Lynch survey of fund managers found that many asset allocators are for the first time in a decade overweight in bonds. It would appear that cash is king at the moment. Given such pessimistic views, what would be your advice for investors in their approach towards their asset allocation strategies?
We are telling clients to stay diversified – be underweight equities with a preference for developed over developing market equities. Defensive sectors such as healthcare and consumer staples are also attractive. An overweight in fixed income is also preferable as long as it is high quality bonds. We like US Treasuries, for example, despite their low yields currently.


How about allocation region- or market-wise? Which markets would you consider overweighting and underweighting?
Overweight Japan and US, underweight in emerging markets as well as Asia-ex Japan. We expect the US financial crisis to spread, affecting credit-dependent projects such as those related to infrastructure in emerging markets, for example.

How about commodities as an asset class for the long-term investor despite the recent declines on the commodities front?
Merrill Lynch likes commodities for the longer-term but for as long global growth slows commodity prices remain vulnerable to the slowing emerging market infrastructure story. We are closely watching China for an upgrade but in the meantime our preference is for gold and agriculture, bulk and base metals.

In terms of equities, what would you view as defensive stocks/ sectors or pockets of resilience in such bearish & volatile times?
Both healthcare and consumer staples are our top two sectors globally.

There was a recent segment on CNN when a Wall Street broker said that despite losing a bundle on Wachovia and Washington Mutual shares, she looks forward to scoop up shares in other banking stocks saying that it's the cheapest for as long as she can remember. Is this a wise strategy, or more of a case of catching more falling knives?
Merrill Lynch believes US financials are value traps and are best avoided until we see massive sector consolidation

Some investors may have the same rationale as the broker above when you consider the price earnings (PE) valuation for many Asian stocks, especially China. Would you recommend bottom fishing for these stocks/sectors as a long-term buy-and-hold strategy?
China is starting to look interesting but while the correlation with the US equity market remains high we remain cautious Asia-ex Japan overall.

Some of the volatility in Asian markets had been attributed to redemptions for example by hedge funds. How long do you think such outflows stemming from de-leveraging will last?
For as long as there is stress in the US financial system there is a reasonable chance that de-leveraging / fund redemption process will persist.

What would you see as signs of the markets bottoming out?
In the US, we think valuations are too high while the earnings to GDP ratio is far too high. So before turning bullish we need to see lower multiples on the S&P500 and a sharp decline in analysts' expectations as they are far too optimistic right now. We also closely monitor investor sentiment, which has declined lately but still nowhere near extreme levels of bearishness. Central bank rate reductions on a global scale would help while the elusive "Death of Equities" sort of headlines on the front page is often a reliable indicator that investor sentiment has gone too far.

Will further rate cuts by the Fed and central banks help? Do you see that happening sooner rather than later?
I think the Fed is holding back awaiting more policy action from Congress. Also the Fed cannot move while the Bank of England, European Central Bank (ECB) and other central banks remain on hold as it will have a negative impact on the US dollar. The market has overwhelmingly disapproved of the reluctance by the ECB to cut.

Is inflation as much of a concern as it was a few months ago?
Inflation concerns have ebbed dramatically as oil and commodity prices have come off. Real rates are negative for most of the world however, and once global economic activity rebounds we might see inflation re-emerging but that is a story more likely for 2009 than at present.

How do you see the greenback faring and what sort of impact will it have on investment strategies?
Merrill Lynch likes the US dollar (USD) – the credit crunch has led to an intense shortage of USD, leading the dollar higher against most currencies. The yen and Swiss franc are also excellent hedge against declining equity markets. We are also overweight Japan equities partly because of the dollar's strength. A strong USD leads us to underweight commodities with the exception of gold.

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Stock Pick
Man Wah Holdings: Neutral (Phillip Securities, 18 Nov), Swiber Holdings: Neutral (DMG, 18 Nov), Armstrong Industrial: Buy (DMG, 18 Nov), Olam: Buy (DMG, 17 Nov), Sembcorp Marine: Buy (DMG, 17 Nov)