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Prudential Portfolio Managers Unit Trusts Ltd - News
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Prudential - Global Commentary for Aug 04
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Wednesday, 15 September 2004
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Fund Manager Comment
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Europe
During the second quarter, the expansion of the UK economy [3.7% annualised] outpaced all others among G7 countries, although July and August have brought evidence of a distinct slowdown in consumer and housing markets. Business confidence in the eurozone remains fragile, with export growth the main driver of whatever economic expansion there is. Despite this, European stock markets have continued to move in line with those of other global regions. Results from the corporate sector have generally been encouraging, thanks to extensive restructuring.
Third quarter company profits [due to be reported in October] seem likely to show further progress, with familiar themes [cost cutting, more emphasis on shareholder returns and outsourcing] remaining very influential. An important test for markets will come from IP’s; the French government is selling a further tranche of France Telecom, and further issues are planned in other countries.
North America
Investors are again tending to focus on macro-economic, rather than corporate developments. The economy grew at a much slower [annualised 2.8%] rate in the second quarter than in the early months of the year, with higher energy prices, in particular, putting pressure on the consumer. In addition, a number of large technology companies, notably Cisco, are pointing to slower rates of capital spending. This general caution in the corporate sector is exemplified by the tendency to hoard cash. Chairman Greenspan of the Federal Reserve is stoutly maintaining the view that the economy is experiencing a ‘soft patch’ rather than a decisive turndown. With the price of oil now well below its peak of US$49.50, the possibility that non-oil influences are contributing to economic slowdown should soon be clear.
Labour Day [the first Monday in September] traditionally marks the start of the presidential election campaign. As election day [November 2] comes closer, this may have some impact on markets. However, the main triggers for markets will continue to be economic and corporate data, with investors hoping that recent slackening in economic activity turns out to be temporary. The publication of third quarter company results in early/mid October are eagerly anticipated. Whilst July’s second quarter results season met expectations, the general cautious tone about the near term outlook was not well received by the market. The combination of rapid earnings growth with the mediocre trend of share prices has brought stock market valuations back to more reasonable levels.
Asia Pacific
The debate over the near-term outlook for the Chinese economy continues. The outcome is as yet unclear, but bank lending for capital investment, especially in construction, has fallen sharply, possibly foreshadowing a lower rate of economic growth in the second half of 2004. However, despite concerns over the possible slowing of economic activity in both China and the US, most leading markets in the region, notably Hong Kong, Korea and Taiwan, have rallied strongly. Long-term prospects for stock markets in the region are well supported by excellent economic and profits potential, whilst short-term concerns over the impact of a possible US slowdown can be accommodated by the modest level of valuations.
Japan
Having outperformed most other leading equity markets during the first twelve months of recovery from its fourteen-year low point at the end of April 2003, the Tokyo stock market is now behaving very much like those in Europe and North America. The unexpectedly sharp reduction in the annualised economic growth rate in the second quarter from 6% to 1.7%, has sparked concerns in some quarters that Japan’s revival is running out of steam. Consumer spending is certainly more subdued, although recent data has been distorted by exceptionally hot summer weather. However, most other fundamentals remain positive: company results are supportive, with companies placing greater emphasis on shareholder value. Further constructive influences are the moderating trend in deflation and new-found stability in the property sector. Clearly, further proof will be required before share prices can embark on the next stage of recovery. The combination of significant change in the corporate culture of Japan and the modest level of equity valuations underpin our optimism over the stock market’s upside potential.
Fixed Interest
With rising oil prices being viewed as more likely to slow economic growth than to aggravate inflation, bonds are managing to claw back some of the losses incurred since the spring. Recently, interest rates have been increased in both the UK and the US but, despite this trend, the persistence of moderate inflation, coupled with forecasts of lower growth in 2005, has helped to restore a measure of confidence to bond markets. Furthermore, evidence of continuing Asian buying of US Treasury bonds is proving helpful to sentiment towards both bonds and the US dollar. Near-term prospects for bonds depend on whether economic activity, especially in the US, continues to slacken in the third quarter. On that basis government bonds are likely to be regarded by investors as an alternative to equities. Bond valuations remain quite supportive, with yields on long-dated stocks being well ahead of expected inflation rates.
As in equity markets, thin August trading, coupled with low levels of new issuance, have not provided a true test for corporate bonds. The combination of a firmer trend for government bonds, credit upgrades and a generally favourable outlook for companies has been beneficial for corporate bonds. Even high-yield stocks, which might have proved vulnerable to the decline in investor risk appetite, are continuing to deliver positive returns, sustaining their star role in bond markets. Instead, investors have taken their cue from lower default rates and from the attractions of their premium yields. The end of the summer lull should herald a stronger new issuance trend, which will provide a tougher test for investors.
Domestic outlook
In South Africa we have already witnessed the positive impact of falling inflation, inflation expectations, nominal interest rates, credit spreads and falling bond yields over the last 24 months. The one asset class that has yet to respond to this dramatic downshift in interest rates has been domestic equities. Although domestic equities have performed well over the past 12 months, most of this has been due to earnings growth and very little has come about due to a re-rating.
The chart above shows various JSE sectors’ current PE versus their 10-year average. As can be seen the bulk of sectors that are linked to the domestic SA economy are some 20-30% cheaper than their 10-year average. This has happened despite interest rates falling. It is for this reason that we remain very positive on the outlook for equities and in particular those counters that are linked to the South African economy.
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Prudential - Global Commentary for Jul 04
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Wednesday, 15 September 2004
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Fund Manager Comment
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Global Outlook
So far this year, strong months for equities have alternated with weak ones, while for government bond markets the second quarter was one of the most difficult in over twenty years. It is hardly surprising that trading volumes are low and decisions are being deferred. On the one hand investors are encouraged by a generally healthy economic background and by a positive trend in corporate results, while on the other there is uncertainty regarding US and Chinese growth trends, the extent of US interest rate rises and the impact of rising oil prices.
August is likely to see further increases in interest rates in the UK and the US, together with more economic data, which might enable investors to gain a clearer picture of the direction in which the world economy is moving. Oil prices are likely to remain a critical influence.
Europe
Whilst concerns for the countries such as the US and China, which originally led the global upswing, are focused on slackening growth momentum, prospects for European economies are starting to improve. Strengthening business confidence, even in EU members like Germany and Italy, which have hitherto lagged well behind, can largely be attributed to buoyant export growth. Consumer spending remains generally dull, except in the UK and Ireland, although the situation in France is now more promising. Inflation in the Euro zone remains above the 2% target level, largely due to higher oil prices, but the ECB appears to take the view that such pressures are only temporary. The performance of European stock markets has largely tracked the global pattern, with weakness in July following a brief rally in June. Three main features stand out. First, the second quarter/half year company results season, unlike its US counterpart, is tending to produce pleasant surprises i.e. profits upgrades and upbeat trading statements. In part this reflects more modest expectations, but European companies are also proving very adept at defending profit margins and in seizing growth opportunities in, for example, Eastern Europe and Asia. Second, the IPO market remains very active, although investors are showing considerable reluctance to subscribe, often forcing promoters to lower the price. This is a good example of how selective [and demanding!] buyers have become. More issues are planned for the second half of the year. Finally, M&A activity is continuing, with the bid from Santander [of Spain] for UK bank, Abbey, possibly opening a new chapter in cross border bank mergers.
North America
Events in the US have led to a poor July for stock markets all around the world. The reaction to the second quarter company results season has been mostly negative. Reported net earnings advanced by some 23%, compared with the same period in 2003, only a little less than the rate of growth in the previous quarter, but slightly below best expectations. However, a combination of conflicting evidence on the state of the US economy and widespread caution among companies on near-term trading prospects unnerved investors. This was particularly evident in the Technology sector, where demanding valuations are being viewed as incompatible with trading concerns. Attempts by the Fed to reassure markets that instances of weak economic data represented only a temporary pause were hardly convincing. Only a more consistent pattern on a broad front [consumption, employment and investment] would resolve such doubts. Meanwhile the oil price has pushed up decisively above $40 once more, a level which, if sustained, could weigh on prospects for both inflation and consumer spending.
The completion of the second quarter results season means that the spotlight will be firmly focused on economic data. The next Fed meeting on monetary policy, set for 10 August, should provide a good insight into the state of the economy and the level of threat posed by rising energy prices. The presidential campaign will also dominate the media over the coming three months, although the result of the election is more important for specific sectors [e.g. Healthcare and Pharmaceuticals] than for the market as a whole. We believe that the general valuation of the stock market is excessive and that with profits growth set to slow progressively from the healthy levels recently reported that upside is limited.
Japan
The recent setback for the Japanese stock market was not a response to any fundamental shift in the economic and corporate news flow. Indeed, economic data continues to be positive, indicating that growth is being generated from rising personal consumption as well as from exports. Furthermore, deflation, a consistent feature for much of the past decade, continues to moderate and property prices are stabilising. Investors are responding by selling government bonds, the asset class that sustained them through the dark days of the 1990s. The question now is whether domestic savers will switch the proceeds into equities. Company profits and cash generation are growing at a healthy rate, corporate restructuring is well entrenched and merger and aquisition activity is an increasing feature. The proposed merger between UFJ Holdings and Mitsubishi Tokyo Financial is one of the latest examples. Furthermore, equity valuations are undemanding and are not discounting fundamental change in the corporate sector. Of course, Japanese financial markets are not immune to external influences. Slowing economic growth in China and the US, in particular, would certainly have an impact on Japanese companies, as well as on investor sentiment. Despite these caveats we remain positive on this market.
Asia Pacific
Initial estimates for the second quarter indicate that the Chinese economy expanded at an annualised rate of over 9%, implying that concerted efforts by the government to prevent ‘overheating’ in certain sectors have yet to take effect. Market sentiment, which took a severe knock in May, has staged something of a recovery. This is most evident in the trend in metal prices, the share prices of mining companies supplying imports of raw materials into China and in the Chinese stock market itself. Most of the stock markets in the region have rallied in sympathy. However, with valuations for good quality companies are still standing at attractive levels.
Fixed Interest
Having just experienced one of the most difficult quarters since the early 1980s, bond markets are now more stable. They are currently pricing in further moderate interest rate rises in countries, like the US and the UK, which have already started to tighten their monetary policies.
The key to determining the near term outlook for bonds is how much further the current interest rate cycle will need to advance to counter inflationary pressures and to return monetary policies to a neutral level. Clearly, the current Fed funds rate of 1.25% is well below neutral [generally estimated at 3-4%], although less adjustment is required by the ECB and the Bank of England, where rates are 2% and 4.5% respectively. Inflation is edging upwards, a trend which is being reinforced by the continuing strength of oil prices, but, with global economic growth widely expected to slow in the second half of 2004, these pressures are likely to abate. Meanwhile, bond yields have risen to levels which are well ahead of expected inflation rates [for example the yield on 10 year government stocks in Austria is 4.33%, in Germany 4.27%, in Italy 4.46%, the UK 5.15%]. These yields should start to appeal to income-seeking investors, especially if greater priority is attached to reducing public sector deficits.
In contrast to governments to who have been increasing bond issuance, the corporate sector has greatly reduced its demands on bond investors for fresh funds. This trend is most noticeable in the high yielding sub-investment grade sector, which had seen a heavy issuance programme previously. Prospects for corporate bonds will be determined both by the trend in government bond prices and by the global business outlook. Default rates are continuing to decline, helped by healthier global business conditions and lower indebtedness in the corporate sector. Furthermore, yield spreads are showing considerable stability. Prospects for high yield bonds will continue to be influenced by changes in the level of investors’ appetite for risk. However, there will continue to be considerable scope within both these asset classes to add value by thorough research and careful stock selection.
Local Outlook
The market has been obsessed with the behaviour of the Rand for some time now. This is perhaps not surprising given that more than 50% of the earnings of the FTSE All-Share Index are directly and indirectly influenced by the currency crosses. Also, pundits often cite the fact that more than 50% of the country’s GDP is made up of imports and exports. This would imply that the currency plays an important role in the price at which traded goods cross the border, and therefore growth expectations.
The facts outlined above has turned virtually every South African into an “economist” with a view on the exact future path of the Rand. This debate often misses the point that currency behaviour matters for price when it is substantially different from expectations. This was indeed the case in late 2001 when we witnessed a spectacular currency event, and again thereafter when the currency surprised consensus by appreciating more than expected.
During the rare occasions when there is a substantial deviation between expected and observed currency behaviour one might find that risk premia are excessively compressed or expanded. This has been the case over much of the last two years when the risk premia on many Resource counters have been significantly compressed relative to domestic Industrial stocks. We have actively exploited this anomaly over that time by being long domestic stocks and short geared-Rand plays such as the Gold and Platinum counters.
The appropriateness of this position must however be questioned when the market’s view on both the expected future currency behaviour and observed currency behaviour converge to some sensible measure of long-run value. Indeed, we find that both the spot Rand/Dollar exchange rate and consensus Rand forecasts have substantially converged to various indicators of fair value. This means that the economy’s decisions on the allocation of production factors may result in normalised profits going forward. This convergence is certain to anchor earnings expectations, which, given the fall in the price of Resource stocks over recent months, suggest to us that risk premia have expanded somewhat. The analytical challenge is then to decide whether risk premia have sufficiently normalised to allow us remove this tilt.
It is worth noting that currency ceases to be a significant driver of asset prices once expectations around currency behaviour have normalised to reflect the stability inherent in a successful inflation-targeting regime. Whilst the theoretical debate surrounding this issue is an interesting intellectual exercise, a more fruitful approach is to consider an example such as Australia.
Australia had many characteristics in common with the South Africa of today during the early years of its inflation-targeting regime; a relatively small economy open to world trade with a stock exchange dominated by Resource counters. It comes as no surprise that much time and effort was expended debating the appropriate value of the Australian dollar during Australia’s transition to a stable inflation environment. This reflected the fact that expectations of “appropriate” exchange rate behaviour was anchored in observations that predated the inflation-targeting regime. The Australian currency first weakened and then strengthened during the period 1985 to 1989, while at the same time their inflation rate increased initially in line with the weakening of the Australian dollar, but only started to fall towards the end of that period.
Back to the present; a cursory analysis will reveal that inflation-targeting has been successful and has had a very beneficial impact on the Australian economy. Moreover, the benefits of stable price have changed currency expectations to such an extent that the strengthening of the Australian dollar vs. the US dollar since 2002 raised no concerns in the popular press. Since mid-2002 there has been a steady increase in the Australia’s target short-term interest rate, which accompanied the unwinding of the currency event they experienced in 2000 and 2001. Note that their inflation rate is currently 2.6%, having peaked at 6%at the height of their currency crises.
It is our view that South Africa will ultimately benefit from inflation targeting in the same way as Australia has. There is no doubt in our minds that this adjustment process will be accompanied by bouts of excessive inflation/currency depreciation, which will serve as vindication, albeit temporary, for those commentators who are still firmly anchored in the past. It is however important not to lose sight of the underlying trend in inflation and it’s concomitant impact on asset prices and economic growth.
In fact, there is some short-term risk that the US Dollar might strengthen relatively more than we would otherwise expect as the US monetary policy normalises. This may, however, only give rise to a cyclical Dollar strengthening that may eventually be mitigated by the impact of rising real rates on growth expectations.
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Prudential - Global Commentary for Apr 04
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Wednesday, 15 September 2004
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Fund Manager Comment
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lobal Outlook
Equity investors remain fundamentally optimistic, but, despite positive economic and corporate news, most indices have only made modest progress so far this year. Concerns over impending action by the Chinese authorities to cool an over-heating economy are undermining sentiment towards mining shares. Observers of the US stock market seem torn between optimism over the prospect of further gains in corporate profits and uncertainty over the likely impact of rising interest rates.
The IMF has raised its forecast for global economic growth in 2004 to 4.6%. Although inflation remains subdued, the US Fed has signalled its willingness to return to a neutral monetary stance once it is clear that strong economic growth can be sustained. In Europe, the Bank of England increased interest rates modestly, whereas the ECB seems content to leave them at 2%.
Europe
The eurozone economy is forecast to expand by only 1.7% this year, well behind the 4.6% rate expected for the world as a whole. However some countries such as Spain and the UK are managing to buck the rather disappointing economic trend. Domestic consumer spending continues to be a source of concern, but companies are taking advantage of export opportunities in North America and Asia and benefiting from the increasing contribution of expanding subsidiaries in those areas. They are also continuing to pursue a programme of corporate restructuring. Consequently, the pattern of reported results has been generally positive, enabling stock markets to make further modest progress. Countering disappointing news on economic recovery prospects from core eurozone members [especially Germany] is the continuing optimism on global prospects. This has been amplified by the recent weakness of the euro, whose 8% depreciation against the US dollar since reaching a high of 1.29 on 18 February has confounded most expert predictions. A continuation of this trend would boost the attractions of European equities.
North America
The balance of economic data and corporate news continues to be decidedly upbeat. The economy expanded by 5% in the first quarter, driven by the strength of consumer spending and by a revival in capital investment. Even employment growth, the one deficiency in the US recovery, appeared to improve in March, prompting hopes that companies were resuming new hiring, as well as continuing to drive productivity gains. Company profits for the first quarter also generally exceeded forecasts and were increasingly accompanied by more confident statements on trading prospects. Yet, despite this flood of good news the Dow Jones Industrial Average is virtually unchanged over the year to date. Part of the explanation may be the relatively demanding valuation of US shares, but this only seems to act as a deterrent to overseas buyers. On the other hand, on the basis of record mutual fund demand, US retail investors clearly feel more confident. However, stronger employment data has triggered concerns that the Fed will begin to raise interest rates as early as August. Rising bond yields since mid-March are helping to dampen equity investor sentiment, but it remains to be seen how this would respond to an actual, as opposed to a rumoured, tightening of monetary policy.
Japan
28 April 2004 marked the first anniversary of the recovery in the Nikkei 225 Index, which has now advanced by 60% from its low point, the best return for any major equity index over the period. It is, perhaps, hardly surprising that Japan has been transformed over that time from the least, to the most favoured stock market in the eyes of international fund managers. The main issue is whether the positive momentum can be sustained. Having been inspired by a picture of rapidly improving economic data, the focus of investor attention now switches to the main corporate results season for the year to the end of March 2004. This is expected to show a strong positive trend, reflecting principally extensive restructuring and the impact of rising exports. Restructuring has been carried out by both manufacturing and service companies, especially among large companies. Ironically, small companies have been less active in this field, but this has not prevented the Topix Second Section Index from comfortably outperforming the main blue chip indices. Exports are strong, manufacturing output is growing and household spending appears to be on a recovery course. The Bank of Japan has shifted its ground on currency intervention, signalling that it will pursue a less aggressive intervention strategy and implying that it will allow the yen to appreciate a little. With valuations still at attractive levels, we remain positive, although a little wary of the current bullish consensus. The potential threat to this optimism could emerge from official efforts to cool the pace of growth in China, a market that has played a key role in the revival of Japanese business.
Asia Pacific
The debate over the state of the Chinese economy is tending to dominate investor attitudes towards the Asia-Pacific region as a whole. Growth in China remains exceptionally robust [the economy expanded by 9.7% during the first quarter], but the central government is expressing concerns about overheating in certain sectors and has started to take steps to rein back growth towards 7%. Banks are being forced to increase provisions and it is likely that interest rates will also be raised. Even a series of concerted actions will only slow economic growth a little and will take some time before they have an effect. Commodity markets have started to take note of a possible slowing of demand, but the impact of an eventual reduction in the rate of expansion in the Chinese economy from 10% down to 7% is likely to be substantial. Whilst other economies in the region, notably Korea and Taiwan, are very large, they are bound to feel some impact if China cools a little.
Fixed Interest
Bond markets continue to be very volatile, principally reflecting changing investor perceptions on the timing of US interest rate changes. Yields on government bonds all over the world have risen sharply since mid-March, a move which has wiped out earlier gains. This is particularly the case in the US, where 10-year Treasury notes now yield more than eurozone bonds of equivalent maturities. Inflation remains generally subdued, despite strengthening prospects for growth in all G7 members outside the eurozone, but this appears to count for little with market-watchers. Recent comments from the chairman of the Fed were intended to reassure markets, although he, nevertheless, indicated that interest rates would be increased, once he was utterly confident that a sustained improvement was in place. The key issue is employment growth, which showed a healthy rise in March, following a prolonged lacklustre sequence. Whilst pessimists inevitably recall the events of 1994, when a sequence of interest rate increases seriously undermined bond prices, we believe the current situation is quite different. In particular, bond yields have already risen in anticipation of higher interest rates and now stand at levels which offer attractive real returns. In our view, continuing low inflation will limit the extent of interest rate increases in the US [2.5-3% is a neutral level], whilst the ECB is likely to leave monetary policy on hold in 2004. On this basis, we see good value in government bonds at current levels and would take advantage of recent weakness to add to holdings.
Corporate bond spreads are holding steady, having tightened significantly over the past eighteen months, although yields have drifted up, in line with the recent trend among government issues. Default rates have continued to decline, helped by healthier global business conditions and lower indebtedness in the corporate sector. We expect this trend to be sustained, although scope for further general tightening of yield spreads is now more limited. In contrast to the abundance of government bond issuance, new offerings from investment grade companies have been relatively sparse. However, sub-investment companies continue to be active in tapping the market, although since many of these issues lack quality, careful scrutiny is required before any purchase decision. We see further potential in good quality medium/long dated investment grade issues, which should benefit from any recovery in government bonds. A well-diversified portfolio of high yield stocks offers an attractive level of income for investors who are content to accept a degree of risk.
Local Outlook
Of greatest concern to South Africans currently may well be the huge decline in returns of the Gold sector due to the fall in the commodity prices and the increase in dollar strength. In addition, given the expectation of rises in global short-term rates, a major positive for the Gold price has been removed. Along with this expected increase in global interest rates is the fear that China will overheat and fail. However, China shows no signs of slowing down and there is talk of rate hikes to cool the economy down. GDP growth is predicted to be at 10% for the year. Consumer spending has also increased, which can then match the huge amount of investment that has taken place in the Chinese economy and may provide a softer landing then previously supposed. This remains positive for commodity pricing and hence for the stability of the South African rand.
There are furthermore concerns regarding the increase in oil prices which would negatively impact on inflation. We remain of the opinion that inflation, despite the occasional increase, will continue to remain within the targets. CPIX for March in fact came in below expectations of 4.7% at 4.4% year on year, down from the February numbers of 4.8%. This smaller than expected increase has been attributed to a smaller increase in excise duties, as well as a month-on-month decline in food prices and domestic workers’ wages. Education and indirect taxes accounted for the bulk of the month-on-month increase in CPIX. Currently investors’ concerns about possible future rises in interest rates in South Africa are dampening performance. However, we still see earnings upgrades and positive comments from the domestic companies.
The PPI rate also came in lower than expected at –1.2% year-on-year, from the February number of –1.1 year-on-year and expectations of –0.7%. Once again the strong rand has impacted positively on this rate. We remain of the opinion that the rand will remain within its current range, particularly if commodity prices remain fairly high.
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Prudential - Global Commentary for Feb 04
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Wednesday, 15 September 2004
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Fund Manager Comment
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Overview
Inflation seems likely to remain subdued, limiting the need for higher interest rates for countries, like Australia and the UK, with specific issues to address. However, the US Fed has recently adopted a more ambiguous stance on the timing of its next interest rate rise, which may create uncertainty for bond markets. High yield bonds performed particularly well.
The recovery in equity markets has gathered momentum and confidence has recovered well. This sets the scene for further progress in 2004, although potential risks, largely relating to the structural imbalances from the US budget and current account deficits, could cause problems.
Regional
Europe
Signs of economic recovery in Europe are emerging, but the pattern is still patchy. Business confidence is being bolstered by optimism about the future and the wider global picture, rather than the current state of affairs. The outlook is most encouraging in the UK, Spain and Ireland, where growth in the current year is on course to exceed the overall EU average of around 2% by a considerable margin. A combination of continuing strong exports and a revival in consumer spending [as tax cuts take effect] are expected to underpin recovery. The corporate sector fared better than the European economy, thanks to both its widespread exposure to the international economy and to extensive restructuring programmes. The company reporting season, which comes begins this month, will have an important bearing on investor confidence. As with US reports, the market is likely to place particular emphasis on the tone of comments from CEOs on trading prospects.
North America
Sentiment among US equity investors is being sustained by positive news flows. Although economic growth in Q4 of 2003 slowed to an annual rate of 4% [from 8.2% in Q3], the balance of data still points to a solid recovery on a broad front, with strong consumer spending, a revival in exports and increasing investment recovery all inspiring confidence. These are only partly being offset by the lack of employment growth. Inflation is very subdued [at around 1%] but recent comments from the Fed, although not signalling an early interest rate increase, appear to be preparing the market for that possibility. Recently announced company results for the final quarter of 2003 have generally exceeded expectations, boosted primarily by cost-cutting and the impact of dollar weakness. IPO and takeover activity are picking up, of which two huge bids in the banking sector, Bank of America for Fleet Boston and JP Morgan for Bank One, are the most prominent examples. Overall market momentum is strong and it will take a considerable reversal to undermine it.
Whilst US investors are positive about their own markets, their overseas counterparts are showing more reserve. This reflects concerns over the impact of the declining dollar on returns and the belief that the relatively demanding level of Wall Street valuations [an estimated 18-19 price/earnings ratio] already discounts plenty of good news. Whilst we see plenty of individual investment opportunities, we retain our overall caution on US equities. Technology stocks, long the market leaders, look particularly expensive.
Japan
The Japanese economic recovery, which has hitherto been driven primarily by exports, is now starting to feed through to employment. With savings high, this could prompt a much healthier trend in consumer spending; especially if efforts to counter deflation bear fruit. Some economists are now predicting growth of 2.5% in 2004 [against virtually no change in 2003]. Prime Minister Koizumi’s renewed mandate should also strengthen his hand in completing the solution to the problems of the banking sector. Meanwhile, corporate profits are advancing strongly, helped by extensive restructuring and success in winning market share in the booming Chinese economy. Companies are generating prodigious amounts of cash, which is mainly being devoted to debt repayment, but may soon be applied, more actively, to new investment. The authorities are acutely aware of the risk posed by the appreciation of the yen, intervening massively to stem this trend. Foreign investors have been at the forefront of the stock market rally. However, domestic investors are now showing more interest and the scale of corporate equity sales is diminishing.
Asia Pacific
Enthusiasm for investment in the Asia-Pacific region is currently being dampened by the uncertainties surrounding the recent outbreak of ‘bird flu’, which raises unpleasant memories of the outbreak of SARS last year. So far the economic impact has mainly been confined to Thailand. As with SARS, the future impact depends critically on controlling the outbreak. Aside from ‘bird flu’, the economic fundamentals of the region remain highly positive. Growth in China could again approach 10%, although the authorities may need to act to control inflation [currently 3.5%] and to address the issue of bank bad debts. Opportunities to benefit from the phenomenal expansion of China are most likely to be found in companies domiciled in other larger and more liquid markets. Notably those in Korea, Taiwan and Japan, rather in China itself. However, enthusiasm for China-based IPOs is likely to be strong, as the recent reception of China Life on Wall Street attests. We continue to favour four particular themes; consumer companies catering for growing local needs; defensive, lowly-valued companies; those with balance sheet strength; and businesses well-placed to supply Chinese manufacturers, i.e. raw materials producers. A regional, rather than a single country approach, makes most sense, providing diversification and limiting specific risk.
Fixed Interest
Government bonds have started the year on a steady note. Investors balancing the positive influence of continuing low inflation with the potentially negative impact of increasing supply, as public sector deficits widen. However, an element of ambiguity has been introduced by recent statement on interest rates by the Federal Reserve, which appeared to prepare markets for a possible tightening of monetary policy at some stage in 2004. Differing economic circumstances elsewhere are prompting contrasting actions by other central banks. Whilst the monetary authorities in both the UK and Australia are raising interest rates, neither the ECB nor the Bank of Japan appear to be under any pressure to change their policy stance. Sentiment in global bond markets will inevitably be heavily influenced by events in the US. The dollar continues to weaken, but Asian central banks are limiting its decline by making aggressive purchases of US Treasury bonds. So, in January, the Bank of Japan’s intervention was equal to one third of the total for the whole of 2003. Such heavy intervention is also holding down yields of US government bonds, which are generally lower than their European equivalents. Near-term prospects for government bonds appear unexciting, with a slightly increased risk on the downside if the Fed starts to tighten policy.
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Prudential - Global Commentary for Jan 04
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Wednesday, 15 September 2004
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General Market Analysis
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Outlook
Equity markets experienced a great turnaround in 2003 - the first positive year since 1999. Bonds ended the year on a stronger note, making good some of the losses recorded since mid-June. With inflation remaining subdued, interest rate rises are set to be modest in 2004. The recovery in equity markets has gathered momentum and confidence has recovered well. This sets the scene for further progress in 2004, although potential risks, largely relating to the structural imbalances from the US budget and current account deficits, could cause problems. We continue to feel that the structural problems in the developed economies - US in particular, but also the UK and to a lesser extent Europe which is merely sclerotic - will lead to a prolonged period of underperformance while the necessary economic adjustments take place. The problems in the US centre around unsustainable consumer demand, excessive consumer debt, growing fiscal deficits and the unsustainable current account deficit.
Regional
Europe
European equities continue to take their cue from the optimistic tone of forward-looking indicators, rather than from the generally dull current economic situation. Signs of recovery are emerging, which should accelerate in 2004. The combination of low inflation and high savings ratios only requires a catalyst to be translated into a revival in consumer spending. Investors are enthused by positive trends in the US and Asia [from which a sizeable proportion of European company profits are derived]. European stock markets, especially Austria, Germany and Sweden, have been the most positively affected markets in Europe. Company profits are generally benefiting from cost cutting and restructuring, although individual profits-warnings are still being reported. Governments are making progress in reforming labour markets and pension provisions.
The main threat to this positive view [apart from developments overseas] comes from the continuing appreciation of the euro. The ECB appears unworried by this trend, but a further move from the current level of US$1.24 to the euro to over US$1.30 might trigger off more negative market sentiment, especially if warnings about the exchange rate are cited by companies as a threat to trading prospects. The coming reporting season [starting in February] will be closely watched by investors.
North America
Most economic data continues to be positive, with strong consumer spending, an investment recovery and, belatedly, signs of employment growth. Further tax cuts to come and continuing low interest rates are likely to sustain the recovery, albeit not at the exceptional annual rate of 8.2% achieved in the third quarter. Inflation is very subdued and the Fed appears reluctant to begin the process of returning its monetary stance to neutral [i.e. a Fed funds rate of around 2.5%, against 1% at present]. Investors appear both confident and optimistic that good times are set to continue. However, we remain cautious regarding the sustainability of this data. Even the steady decline in the dollar on foreign exchange markets [from 1.05 to 1.24 against the euro since the start of the year] is being viewed in a relaxed manner. Indeed, the positive aspects [improving competitiveness for US companies and translation gains from the 20% of profits earned outside the US] are contributing to investor enthusiasm.
Whilst US investors are positive about their own markets, their overseas counterparts are showing much more reserve. This reflects concerns over the impact of the declining dollar on returns and the belief that the relatively demanding level of Wall Street valuations already discounts plenty of good news. The corporate news flow, starting with the 2003 final quarter reporting season in January/February should again be positive and the pattern of economic data also appears to be set fair. We retain our overall caution on US equities.
Japan
The powerful rally in the main Japanese stock market indices, which amounted to nearly 50% between late April and October, is showing signs of dissipating. This may be no more than a phase of consolidation, while the market determines whether the rehabilitation of the country’s economy and corporate scene is on track. The economic outlook looks promising, with optimists predicting growth of 2.5% in 2004 [against virtually no change in 2003]. Prime Minister Koizumi’s renewed mandate should also strengthen his hand in settling the problems of the banking sector. Corporate profits are showing good growth, boosted by exports and the impact of Chinese expansion, and, in the absence of major capital spending programmes, companies are generating large amounts of cash, which is mainly being devoted to debt repayment.
Asia Pacific
The phenomenon of China’s exceptional growth profile, one of most exciting stories of 2003, has been crowned by the huge success of the China Life IPO on Wall Street. It was twenty-seven times oversubscribed and has generated significant demand for further IPOs from China. Enthusiasm for investment in the Asia-Pacific region remains at a high level, driven by strong economic growth rates and the relatively modest level of share valuations. Success in China has also drawn investors to other countries in the region, notably India and Thailand. The chief potential risks to this optimistic view are protectionist measures from the US and excessive pressures on the Chinese economy, especially on its banking system, as a result of its recent, rapid expansion.
Fixed Interest
The reassuring tone of recent comments from leading central banks has comforted investors, ensuring that, following a roller-coaster year, bond markets have ended the year on an upbeat note. The common message is that inflation is both low [for example the 1.1% annualised rate in the US is the lowest since 1963] and is expected to remain subdued. The further implication is that, despite recent monetary tightening in Canada and the UK, interest rate increases in 2004 will be modest [and certainly below more aggressive recent forecasts]. This has defused some of the market’s earlier concerns over the inflationary implications of stronger economic growth and higher public expenditure. The Fed has also managed to restrain bond yield rises, despite the burgeoning current account deficit and continuous weakness in the dollar. However, some negatives remain, principally the prospect of increased issuance to finance higher government budget deficits. In the eurozone, the decision of the European Commission to suspend the Stability Pact points firmly in this direction. European government bonds offer yields which are well above the rate of inflation and do not present investors with the daunting currency risk faced by holders of US bonds.
In the corporate bond market, high yield stocks have been the star performers of 2003, attracting buyers on account of their income advantages and their sensitivity to the strengthening business environment. Yield spreads on high yield bonds are now, in general, below long-term average spreads.
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Prudential - Global Commentary for May 04
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Wednesday, 15 September 2004
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Fund Manager Comment
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Global Outlook
Despite positive economic data there are some concerns in the market such as higher energy prices, concerns over the prospect of an earlier than expected increase in US interest rates, a marked deterioration in Iraq and fears over new measures to rein in explosive economic expansion in China.
Europe
European economic data has been surprisingly positive, with reported growth of 0.6% for the eurozone during the first quarter exceeding general expectations. Outside the UK, consumer spending remains subdued, but the strength of exports, especially to China and North America is proving decisive, even though this also highlights the eurozone’s dependence on external forces and its own inability to stimulate recovery from domestic sources. European companies, like their US counterparts, continue to generate favourable trading news, with cost-cutting partly offsetting the relatively dull domestic economic background, especially in Germany and Italy. The impact of global uncertainties, especially higher oil prices, is paramount. The rise in eurozone inflation above its 2% target and continuing potential pressures from the buoyant housing market in the UK have removed the possibility of further interest rate reductions. Indeed the situation in the UK suggests that rates will be increased by a further 0.25% in August. Geographical differences between European stock markets have become more marked, with the defensive character of the UK [above-average yield, relatively low exposure to cyclical sectors] attracting attention. Shares in smaller companies, the star asset class of 2003, have generally ceased to outperform blue chips.
North America
There has been little overall change in the tone of economic data from the US, or of news from the corporate sector. The economy continues to grow strongly [by an annualised 4.4% in the first quarter] and on a broad front, with consumer spending, employment growth and investment all making important contributions. The only significant statistical change is the upward drift in the rate of inflation, due mainly to the impact of rising energy prices. Most companies continue to report impressive profits growth and generally optimistic trading forecasts, although the results to be announced in the next quarterly reporting season [due in mid-July] will inevitably appear less exciting than the 25% average advance recorded for the first quarter of the year.
Developments in the current month will have an important bearing on the confidence of fund managers. The next decision of the Federal Reserve on interest rates, which is widely anticipated to result in a rise of 0.25%, will be announced on 30 June. The trend in oil prices will be largely dictated by whether increased OPEC supplies can be implemented in the face of intensifying terrorist threats to installations, especially in Saudi Arabia. The impact of events in Iraq is also impinging increasingly on US electoral and market fortunes. Finally, the coming second quarter company reporting season will be eagerly watched, both for the strength of profits advances and for the tone of comments on the business outlook. Any resolution of the issues under discussion could push share prices higher, sending an important message to stock markets around the world. The issue for external investors is whether it is worth paying the premium to buy directly into the US stock market, rather than reaping the benefits by buying into more cheaply valued non-US markets.
Japan
The newsflow on Japan has continued to improve, but this has not prevented a sharper than average recent setback for the stock market. The economy expanded at an annualised rate of 5.6% during the first quarter of the year, with support from consumers [household spending up by 9.3%] as well as from export activities. Companies are reporting strong profits and cash generation, helped by restructuring and cost cutting. Progress is also being made on solving the bank bad debt issue. There is some concern regarding the dependence of Japanese exporters on China and by the country’s above-average vulnerability to high oil prices.
Asia Pacific
Asian markets have suffered considerable setbacks in recent months. Oil price rises are particularly significant to Asian economies, especially China, the world’s second largest oil consuming economy, which also has a potential problem with inflation. Investor confidence in India has been undermined by the recent defeat of the incumbent business-friendly administration, while tension between China and Taiwan has destabilised stock markets. However, Asia continues to show strong numbers where for the most part the region is running a current account surplus and there is moderate credit growth. Despite the prospect of some tightening in China, growth in exports to the US will probably cushion Asia from the effects of a slowdown in China. In China some monetary tightening appears to be occurring as accessibility to loans appears to be curtailed. China PPI came in higher than expected, while Hong Kong GDP growth for Q1 2004 is up to 6.8% yoy.
Fixed Interest
During the recent phase of market instability, bonds have failed to fulfil their traditional defensive role. This is unsurprising; a potential inflationary threat [from high oil prices and as a consequence of excessively low US short-term interest rates] and the prospect of a period of tighter monetary policy hardly amount to a bond-friendly background. Add in memories of events in 1994, when the Fed raised interest rates from 3% to 6% and triggered severe global bond market weakness, and the current mood of caution is understandable. But, in our view, 2004 is unlikely to be a simple repeat of 1994. Current inflation is low, inflationary pressures are relatively modest and, in contrast to 1994, bonds yields have already risen substantially in anticipation of higher interest rates. For example, the yield on 10-year US Treasuries has increased by over 100 basis points to 4.7% since mid-March, a trend which has been replicated in bond markets all over the world. It seems likely that the Fed will start raising interest rates at its next meeting at the end of June, gradually moving them up from their current 1% level to a neutral point, probably around 3%. Other central banks, including the Bank of England, will continue to follow similar courses, but the European Central Bank may manage to hold rates at 2% for the rest of the year. Government bond yields may rise further, but at current levels [e.g. 4.3% for German 10-year stocks] they offer fair value, especially if the market’s worst fears about inflation prove unfounded.
The performance of government bonds will continue to be the dominant influence on the level of returns from investment grade corporate debt, the major source of variation being fluctuations in yield spreads. Default rates are continuing to decline, helped by healthier global business conditions and lower indebtedness in the corporate sector. We expect this trend to be sustained, although scope for further general tightening of yield spreads is now more limited. In contrast to the abundance of government bond issuance, new offerings from investment grade companies have become relatively sparse. However, the trend for sub-investment corporate bonds, hitherto strong performers, has shown a sudden deterioration, in line with the sharp rise in risk aversion among investors generally. This has also been reflected in a marked reluctance of investors to subscribe for new issues. Our view remains that, given the strong underlying demand for income, any significant diminution in the current level of risk aversion should see buyers return for corporate bonds.
Local Outlook
The price of Resource stocks fell by some 20% over the period April to mid-May. The observed price move reflects the markets continued uncertainty towards the sustainability of the commodity cycle and the impact of an increase in the Fed Fund’s rate towards more normal levels.
Concerns about the sustainability of the commodity cycle stem from continued efforts by the Chinese authorities to slow down investment in certain sectors that have seen significant capital investment funded by cheap debt over recent months. This is never a healthy sign, especially given that returns on the asset base of these sectors have deteriorated over time. This is however not a broad based attempt at fiscal and monetary restraint, which might slow the economy from 9% real growth per annum to 5% to 7% per annum. Whilst the market chose to reflect their concerns by derating the share prices of commodity producers, commodity prices remained largely unaffected.
This in part reflects the fact that the US is currently experiencing robust growth of some 6% per annum nominal, which is being funded by a 1% Fed funds rate. This is a disequilibrium position that is not sustainable, hence the current preoccupation with the possible impact that a normalisation of the Fed funds rate will have on asset prices. It is our perspective that any increase in the Fed fund rate may negatively impact available asset yields, many of which are currently well below equilibrium. We are of the view that such an environment will only have a marginal negative impact on the demand for commodities and commodity prices.
The observed price move of Resource stocks has vindicated our longstanding underweight Resource position. Indeed, the valuations of many Resource counters still remain stretched on any reasonable measure of value.
It is our view that these valuations are sufficiently attractive to allow us to take on the potential negative impact on asset yields of a gradual normalisation of the Fed fund’s rate. We have therefore increased our exposure to these stocks, whilst we continue to avoid those counters whose valuations remain stretched.
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Prudential admitted to AForbes Large Manager watch
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Monday, 2 December 2002
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Media Comment
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Prudential is to be admitted to the Alexander Forbes Large Manager Watch as one of the 10 largest asset managers in South Africa.
As from 1 January 2003 Prudential will replace FTNIB in the Alexander Forbes Global and SA Large Manager Watch Survey as one of the ten largest asset managers in South Africa.
As at the end of September 2002 Prudential's assets under management were over R15 billion. Prudential's popular inflation-linked mandates and strong investment performance have contributed to their substantial growth in assets. As a wholly owned subsidiary of Prudential Plc, the South African operation is backed by the balance sheet and resources of one of the world's largest investment managers.
Based on current rankings Prudential will debut in the Large Manager Survey with an impressive long term track record which should place them in in the top three over 1,3,5 and 7 years.
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Prudential market commentory - Aug and September
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Thursday, 19 September 2002
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General Market Analysis
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Overview
Equity markets rallied strongly during the early part of August, accompanied by government bonds although, perhaps surprisingly, not by corporate bonds, where spreads continued to widen. Improving perceptions about future Fed policy moves and a surprisingly generous IMF package for Brazil were the key drivers of sentiment. In response to ongoing weak economic news flow and changing interest rate forecasts from prominent Wall Street economists, markets have now begun to price in cuts in Fed Funds, although given a slight rise in the payroll figures, there is a chance that the Fed may leave rates as is.
The first anniversary of the terrorist attack on US targets on 11 September 2001 will focus attention closely on related issues, especially the implications of a US-led attack on Iraq. This could produce renewed nervousness in financial markets.
Events in the US will continue to set the trend for other markets. The course of economic data and the tone of third quarter company reports [due in October] will exert great influence over investors' behaviour.
The recent bounce in global stock markets has brought some relief to sectors like Insurance, Pharmaceuticals and Telecoms, which have been under particularly heavy pressure over the past year. Many of these were seen to offer excellent value in relation to the uncertainties they faced. Hitherto, the market's main emphasis has been on defensive areas. This may return in the event of heightened tensions over Iraq pushing both gold and oil prices higher. However, at current levels investors seem prepared to take a broader view on sectors with longer term potential. In this respect, recovery prospects in Technology still appear quite distant, but both Financials and Healthcare offer attractive opportunities.
Regional
North America
The near 20% rally in the S&P Composite Index from its low point on 23 July has made good some of the losses suffered since mid-May, but it does not necessarily mark the start of a renewed market uptrend. Investors had reacted negatively to a range of issues, from accounting scandals to profits warnings and had adopted the view that matters were bound to deteriorate still further. Bad news was largely discounted but little was being priced into the market for positive developments, like the passing of the 14 August deadline for disclosing accounting irregularities or the prospect that the Fed would cut interest rates below their current 1.75% level. Relief encouraged bargain hunters and the rush by hedge funds to close their short positions added enormously to market volatility. Many of the sectors which suffered most in the market downturn staged the strongest recoveries. Even the US dollar has recovered recent lost ground.
Investor confidence has revived somewhat, but it remains highly sensitive to the course of events. Most reported economic data is pointing to fairly sluggish growth this year, with consumers and public spending providing the main supports. Financial markets will focus on future reports for evidence of how the economy is performing. The forthcoming Fed meeting on 24 September will be especially crucial. For companies, the critical issue is when this more stable outlook is translated into a more positive outlook for business. The next test is the third quarter reporting season in October. In addition, markets are starting to take note of the possibility of US-led military action against Iraq. Neither the timing nor the scale of any attack are certain, but, with the first anniversary of 11 September 2001 upon us, the influence of Middle East events is likely to exert a major influence on financial markets. Meanwhile, in absolute terms, valuations of US shares are demanding by historic standards, although they appear cheap relative to bonds. All this points to continuing market volatility on Wall Street, which will be quickly transmitted to other international stock markets. Although we remain generally cautious, there is some value in the market for selective buyers.
Europe
UK and European equity markets continue to be heavily influenced by US preoccupations and trends, responding almost slavishly to each move on Wall Street. The recent stock market rally from the 24 July low almost exactly replicated the timing, extent and sectoral character of US equity indices. A similar pattern was evident in the preceding decline from mid-May. Oversold sectors, especially Insurance, and high yielding shares rebounded especially strongly. However, it is somewhat disappointing that the comparatively less demanding level of valuations of European companies appears to offer little performance advantage relative to their US equivalents. This partly reflects the slower underlying rate of economic growth in Europe, which has been evident in recent signs of sluggishness, especially in Germany. But it takes little account of fundamental changes taking place in European companies, especially those with leading position in global markets. As in the US, bonds have responded well to subdued inflation and to indications that interest rates are set to remain at current modest levels for longer than was previously envisaged.
Institutional investors remain cautious, although buyers are a little less risk-averse than before and are prepared to buy on a selective basis when good value is apparent. This is most clearly demonstrated in the subdued level of IPO and merger/acquisition activity. Retail savers are more sceptical after more than two years of generally falling share prices and tend to prefer the defensive merits of bonds to equities. The course of events in the Middle East is destined to have a major short-term influence. Such periods of weakness should present excellent buying opportunities.
Japan
Following encouraging indications in the first quarter of the year, the pace of economic recovery in Japan appears to be slackening. This may reflect the impact of earlier strength in the yen against the US dollar on exporting companies, although this position is now starting to unwind. Investor interest in Japanese equities has also been undermined by the lack of progress in making structural reforms. Consequently, in contrast to the pattern in other leading stock markets, Japanese shares remain in the doldrums. In the absence of any changes in official policy, there seems little reason for investors to take a more positive stance on the Tokyo stock market in the near term.
Pacific
Asia Pacific equities continue to be more closely influenced by US rather than Japanese economic and market trends. However, the recent recovery of these markets since the low point in end-July has been more subdued than in the US. This is probably a reflection of lower projections for economic growth in vital export markets in Europe and North America. Yet the case for investment in the region remains convincing and a resumption of a more positive trend is expected when some of the uncertainties relating to the US economy are resolved. Valuations are still attractive and companies are particularly well placed to benefit from world economic recovery.
Emerging Markets
These markets attracted significant investor interest earlier in the year on account of their cheapness and their potential to benefit from stronger world economic activity. Recent concerns about global growth have somewhat undermined these attractions, prompting widespread profit-taking. We anticipate that investors prepared to accept the high inherent risk in these markets will maintain their interest, albeit on a selective basis. Asia is the preferred area, on account of its strong fundamentals and modest valuations, while Latin America could present further problems.
Fixed Interest
The recent equity market rally and the associated slight relaxation in investor attitude to risk has diverted attention, to some degree, from the defensive merits of government bonds. Nevertheless, the economic and monetary environment, with continued low inflation and evidence of slowing economic growth, remains essentially bond-friendly.
The US Federal Reserve has indicated that it is prepared to cut interest rates further to safeguard economic recovery and markets will focus closely on its forthcoming meeting on 24 September. Both the Bank of England and the European Central Bank have moved away from tightening monetary policy, although sustained higher oil prices and a setback for the euro in foreign exchange markets could create a dilemma for the ECB. Some commentators are talking about deflationary risks to the world economy, a prospect which would lead to lower government bond yields.
Corporate bond yield spreads over government bonds have fluctuated according to sector and the standing of the issuer. Top-rated AAA and AA issues have remained stable, but spreads on sub-investment grade corporate bonds have widened significantly and new issuance in this area has diminished. However, the stable performance of government bonds and recent signs of more relaxed attitude to corporate risk has drawn attention to the attractive prospects opening up for selective buyers. Demand for investment grade securities, especially from UK pension funds, remains strong. Meanwhile, the size of the sub-investment grade corporate bond market has been greatly inflated by the addition of 'fallen angels', former investment grade bonds issued by companies like Ericsson and Vivendi. Corporate bonds stand to benefit from falling default rates and the projected easing of business pressures on companies over the next year.
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Opportunity in Asia being overlooked
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Monday, 26 March 2001
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Media Comment
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Most investors are running scared after the emerging market disaster of 1998 when Russia defaulted on their loans. So why should anyone reconsider investing in Asia? Anton Turpin, Managing Director of Prudential Unit Trusts, explains why Prudential feels that the region is being overlooked for the wrong reasons.
You cannot expect to make money without taking on risk, that's the danger of following the crowd.
The consensus view is that a global slowdown will push Asia back into recession or at least slow down growth. Asia is dominated by its manufacturing and technology sectors, both sectors that are extremely susceptible to world demand for consumer durables. These are the exact areas that are currently most affected by the threat of recession in the US.
Asia is still battling against the negative sentiment prompted by emerging market contagion, on the one hand and political stress on the other. Yet there is good news out there if the investor is willing to see past market sentiment and take a look at the underlying reality. Company analyst who favour Japanese’s equities do not appear to be affected by negative sentiment surrounding industrial production and GDP forecasts
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"In value investing we are always looking for situations that appear to be depressed, but where the underlying fundamentals remain sound," says Graham Mason, Chief Investment Officer at Prudential.
Global market sentiment seems to be based on US trends rather than on fundamentals in the specific Asian economies themselves. If the market in Japan continues to deliver normal profit growth then reasonable returns can be generated. Japan needs a positive catalyst to set this in motion, in particular a firmer stand by the Japanese government with regards to political and economic reform.
Prudential is not alone in spotting value in Asia. Foreign buying of Japanese equities increased sharply recently with net foreign purchases of Japanese equities being positive for the last 5 weeks in a row. In many Asian markets there is still room to manoeuvre in terms of monetary policy, which implies that these markets can still be stimulated. Equities in this area are still under valued, as the returns are higher than in Europe.
(Source: Investing Abroad, Autumn 2001)
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