Q&A with Tey Tze Ming
Saxo Capital Markets, Asia Pacific Strategist

Given the bearish market conditions, what would be your advice for investors in their approach towards their asset allocation strategies?
They should be rotating out of a lot of asset classes that are experiencing high volatility at the moment. Our internal hedge fund is holding around 85% cash at the moment, for example, with only 15% exposure in bonds and equities.

How would you allocate the mix of equities vs bonds and other asset classes (and what sort of time frame for such an allocation strategy)?
As long as this choppy, uncertain market continues, we are advocating 80% cash, and equal 1/3 positions in forex (FX), stocks and bonds (or bond funds). We are hoarding cash these few weeks as you also want to be holding a lot of buying power when we get signals that the market is bottoming out and starting to pick up.

How about allocation region- or market-wise?
We are firmly bullish on Asia to outperform the rest of the world in a recovery cycle and will look to be overweight this region when that happens, perhaps late next year.

Which markets would you consider overweighting and underweighting?
At the moment, it seems Europe is due for more correction. On a region basis for equities, we are overweight Asia, neutral in the US and underweight in Europe.

How about commodities as an asset class for the long-term investor (though there has been declines recently on the commodities front?
Recent expectations in world growth – or the lack of it – have been putting commodity prices under pressure. A recovery in these expectations will not materialise until we have evidence that the world is firmly in recession. Expectations should then shift to a recovery and only then will commodity prices bounce back.

What would you see as signs of the markets bottoming out?
A final capitulation where we see extreme losses (and a bounce back) on a single day followed by an extended period of flat lining of equities. In our opinion, there is no rush to get back to 'buy the bottom' as the sideways action expected to follow a 'real' market bottom will provide plenty of opportunities to buy for the long term.

Will further rate cuts by the Fed and central banks help?
They might temporarily support the markets but you cannot 'force' businesses to borrow and invest if they think the future is uncertain, no matter how cheap the cost of money will go, so we expect a gradual slowing.

How do you see the US dollar (USD) faring and what sort of impact will it have on investment strategies?
Bond issuance to fund the Troubled Assets Relief Program (TARP) programme in the US will likely fuel USD demand, so we are looking for an extension of recent gains. However, mid-term when the dust has settled, we see the USD coming under pressure amid a deteriorating US fundamentals and economic outlook.

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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)