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December 31, 2013

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Home » Business » Biz Special

Investment shifts to developed economies

By Hu Xiaocen | December 31, 2013, Tuesday | Print Edition

Global investors are shifting their focus from emerging economies back to developed ones as the latter show signs of a pickup.

In an interview with Shanghai Daily, Mark Matthews, head of research in Asia for private Swiss bank Julius Baer, talked about the latest trends in global investing.

Matthews has 18 years’ experience in finance and investment sectors across Asia. He is currently based in Singapore with the bank.

Before he joined Julius Baer in 2011, he was a strategist and analyst at several financial institutions, including Macquarie Securities, Merrill Lynch, Standard & Poor’s Ratings Service, ING Baring Securities and Nomura Securities.

He holds a master’s degree in business administration from the Schulich School of Business at York University in Canada.

 

Q: What’s your take on the Bitcoin phenomenon? Do you think it will last?

A: No, I don’t think so. It reminds me of Esperanto. That was an artificial language that never got off the ground. I think Bitcoin is the same thing. It’s not real currency. I think people want something backed by the central banks. In fact, I don’t think virtual assets have a lot of wealth. The same thing applies to Facebook and Twitter.

 

Q: Do you think gold is worth holding in the long term?

A: Emerging markets, primarily in China, southeast Asia and Latin American, have developed middle classes. People in countries where gold is part of the culture have became wealthier. That was the situation before 2007 financial crisis.

After 2008, there were the crises and recessions in the US and Europe. Central banks responded by cutting interest rates to practically zero. Some central banks, such as those in England, the US and Japan, bought a lot of bonds, which pushed down yields. So if people weren’t getting money from their bank accounts or from the bond market, they asked themselves: “Why don’t I own gold?”

I think that era will end sometime next year. Some of the people who have been buying gold as an investment to protect themselves from currency devaluations have sold their gold, taking the price back to 2010 levels.

With each passing day, we see better economic numbers coming out of the US, Europe and Japan. Quantitative easing and ultra-low interest rates will be phased out.

What does well in the beginning of a growth cycle is not gold, it’s stocks.

Q: What about the Federal Reserve’s quantitative easing?

A: The Federal Reserve had been hinting since February last year that it was looking to reduce its monthly asset purchases as the economy improved.

But it was frightened by the sudden move in treasury note yields, from 1.6 percent to 3 percent, from May to September, so postponed the reduction in asset purchases that it had hinted would start in September.

Since then economic data has been strong, and the Fed decided to go ahead and reduce bond purchases in December. The markets have taken this announcement well, in general, with the treasury note yield at 2.9 percent, and the S&P 500 at a new high.

Only emerging markets, which saw large inflows due to the asset purchase program since 2009, have fallen noticeably. US economic data continues to surpass expectations — the US has the second-highest manufacturing PMI reading of all large nations, smaller only than that of the UK.

We expect another positive year of share price and high yield bond performance there, albeit less than 2013’s very strong rise.

 

Q: Do you think there is a bubble in the US market?

A: Some people, like Larry Fink, CEO of BlackRock, say there is a bubble. Back in 2000, at the Internet bubble, company earnings didn’t go up as much as the market.

Back in 2007, even though earnings were very high, over half of that came from finance companies like JP Morgan and Merrill Lynch.

As we know now, it was a hidden bubble. But today’s earnings are quite genuine, coming from household names like Wells Fargo and General Electric. At least the evaluation doesn’t look like a bubble.

The price-to-earnings ratio in the US is about 16.5 times, which is not that high to be a bubble. You call it a bubble when the figure is above 25. But 16.5 is also not cheap. Cheap is something like 10 times.

Q: What would be your asset allocation for next year?

A: Our asset allocation will be very overweight on the US and Europe, with little exposure in emerging markets. The reason is simply that if the developed economies are getting better, which they are, then there is less of a reason to be in emerging economies.

This reminds me a lot of what happened two decades ago, when the Federal Reserve started to increase rates in 1994 as the economy was getting better. That’s when the peak of the great bull market in Asia stopped abruptly. That is what is happening now and should continue to happen for the foreseeable future.

 

Biz Special


 

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