Friday 29 Mar 2024
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DESPITE the uncertain market environment brought on by concerns over China’s slowing economy, Nomura Asset Management Malaysia Sdn Bhd expects the US Federal Reserve to raise interest rates by year-end. A clear decision by the central bank will bolster the stock markets, it adds.

The Federal Open Market Committee (FOMC) is set to meet on Sept 16 and 17.

“The house view is that there is a likelihood of a rate hike before year-end. Looking at employment and housing figures, everything seems to be moving in the right direction for a rate hike,” Nomura’s head of investment, Leslie Yap, tells digitaledge Weekly.

In July, US housing starts rose to an eight-year high of 1.206 million, above the expected 1.19 million, while employment data indicates a monthly growth of 215,000, thus keeping the unemployment rate at 5.3%.

“I don’t see this [the rate hike] as a negative for the equity market as long as it is not the start of a rapid few rounds of rate hikes. If it’s just a one-off hike and the economy continues to grow, then it would be a better investment environment. That will stabilise things even for emerging markets,” says Yap.

An obvious signal from the Fed will take a chunk of uncertainty off the markets and participants can start making good investment decisions, he adds. Developed markets like the US, Europe, Australia and Japan are Yap’s main focus.

Global markets have experienced a tumultuous few weeks with a major selldown that began on Aug 17. The benchmark S&P 500 Index tanked 11.2% to 1,867 points on Aug 25 before rebounding almost to 1,999 points three days later. It ended at 1,951.13 points last Thursday.

The FTSEuro First 300 Index, which tracks Europe’s largest 300 companies by market capitalisation, fell 10.4% over four days to 1,349.5 points on Aug 24 before regaining close to 6.3% in three days. It closed at 1,428.77 points last Thursday.

Over six days, the Tokyo Stock Exchange Price Index (Topix) tumbled 14.4% to 1,432.65 points on Aug 25 before recovering to close to 1,550 points by Aug 28. Similarly, the bellwether Nikkei 225 fell 13.6% over six days to 17,806.70 points on Aug 25 before recovering 7.5% to 19,136.32 points on Aug 28. Last Friday, Topix closed at 1,444.53 points while the Nikkei 225 ended at 17,792.76 points.

Nevertheless, Nomura is positive about developed markets as most of them appear to be on the road to recovery. “Our house view is that at year-end, we could see a 5% to 8% increase in, for example, the Euro First 300, Topix and S&P 500, from current levels,” says Yap.

“The key problem is the negative impact on emerging markets, given the [weak] currencies and exposure to US debt. But once people know the direction, economies and companies are going to know how to adjust to it,” says Yap.

A 25bps hike, for example, is not going to have a big effect on companies in the US, Europe or even Japan, which have been de-leveraging in recent years, he adds. “Emerging market sentiment will be a bit weaker because of the feeble currencies but we are already seeing that and investors have likely already factored this in, as we saw in the recent selldown.”

On the home front, the benchmark FBM KLCI began its downward trajectory at the beginning of August, crashing 11.1% from the start of the month to a three-year low of 1,532.14 points on Aug 24. It ended the week at 1,589.16 points.

The ringgit fell to a 17-year low of 4.2995 against the greenback intraday on Aug 26, and last Friday closed at 4.260 per US dollar. The ringgit was pegged at 3.80 against the US dollar from 1998 to 2005.

But apart from the impending US rate hike, the shaky global markets took their cue from China, which devalued the renminbi last month.

For many, the devaluation was seen as a way to bump up China’s exports, feeding fears that the republic might not be able to meet its economic growth targets. “What people need to see is that the decline in growth does not accelerate,” says Yap.

In the meantime, global investors have become wary and pulled out of emerging markets in general. There are obvious signs that growth in the emerging markets, which are a magnet for American corporations, is faltering, says Yap. For Nomura, this means more interest in companies that are exposed to the US domestic market.

US equities look favourable with the asset class yielding at least 2% to 2.5% compared with 2.2% from 10-year treasury bonds.

“From now until the FOMC meeting, global markets will remain volatile. There might be opportunities if things get oversold. If they go below the recent low, we will be looking at opportunities to invest further. If we see another 5% to 10% downside to the recent low, I think investors should start looking at some good quality companies,” says Yap.

“Current valuations, I would say, are fair, given the current interest rate environment and lack of growth.”

According to Yap, while US consumers have been seeing better employment opportunities, cheaper gasoline and more spending power, there has not been a big pick-up in consumer spending yet. Thus, retailers with a large presence in the US that could capture this wave of spending would be good investments.

“Healthcare is another area that is very US-centric. Obamacare has pushed more people into healthcare insurance coverage. So, with the improving economy, the average person has been spending more on healthcare recently than five years ago when the economy was in recession.”

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This article first appeared in Capital, digitaledge Weekly, on September 7 - 13, 2015.

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