Sarasin finds silver lining in financial storm

16 October 2008

Investors are advised to take a fresh look at global markets and seek opportunities despite the financial crisis over the past four weeks, according to the chairman of the Sarasin Group Asset Allocation Committee, Guy Monson.

"At every point in a crisis, as I have experienced over the past 20 years, there comes a time when you can begin to see a silver lining," he said.

"While the speed and severity of this global financial crisis are unprecedented, investors should realise that there are tremendous investment opportunities available now. If policy responses are correct, core Asian economies could lead a stock market rally."

Speaking in Hong Kong, Mr Monson noted that the world is now reliant on Asia for growth as the engine of global demand. Asian economies, he said, will be helped by lower inflation due to falling commodity prices and real oil demand destruction in the US.

He is optimistic that core Asian economies, in particularly China will weather the crisis, noting that its economy is well positioned for recovery given its minimal internal and external debts. China's growth will however be largely dependent on domestic demand as exports decline due to the effects of a recession outside of Asia.

While growth rates in Asia will slow, Asian stocks and other emerging market stocks are undervalued, creating opportunities for investors. Mr Monson noted that the levels of financial leveraging has fallen from 65% to 22%, the lowest level in the world among the 700 largest listed Asian companies. He also added that some 40% of Asian stocks pay higher dividends than the government bond markets, with that rising to 80% for Singapore stocks.

"Unprecedented government actions over the past week have resulted in the creation of hybrid half-state half-private sectors. These will provide interesting bond opportunities for investors," said Mr Monson.

Beyond blue-chip Asian corporates, Sarasin also recommends the high quality corporate bond markets, including the emerging hybrid bond markets; defensive stocks (utilities, water, food, and particularly pharmaceuticals); and energy and materials (metals and mining).

Mr Monson said that global equity markets had been the victims of their own success, having provided the only liquid exit for distressed hedge funds, over-leveraged prime brokers and derivative managers seeking to offset risk in the bond or commodity markets. Forced sellers have dragged down the only market that was 'open for business'.

While this means equities may yet 'overshoot' on the downside, large global companies can offer liquidity, dividend flows that have growth potential (against money market rates that will tumble) and in most cases, balance sheets that are now far stronger than those of their bankers – all at unprecedented valuation lows. As banking conditions normalise with the support of central banks, these assets will rally first.

Further, Sarasin recommends avoiding companies that are vulnerable to discretionary consumer spending or non-essential capital investment programmes.

It has however issued some caveats for investors. For a recovery to be sustained, investors should look for money-market rates to narrow, a US dollar that does not experience a precipitous fall, and stabilising housing prices in the US, said Sarasin.

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