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Thumbs up for the underdogs
LGT backs buying unloved and undervalued assets
Bayani S Cruz 1 Mar 2015

Among the contrarian positions that LGT Private Bank recommends are overweight on Japanese equities and global information technology (IT) stocks; buys on Chinese equities as well as German/European Union (EU) equities and senior loans.

Such positions are based on a lack of evidence that global equity markets are in a euphoric state despite sizeable gains seen in the US, Chinese and Indian equity markets in 2014.

“Current fund manager cash levels of 5% are more consistent with further gains than declines in risk assets. This has proved to be a reliable guide to future returns in the past and it is why we stay overweight risk assets in 2015. Developed market equities are still preferred to emerging market ones,” says Stephen Corry, head of investment strategy at LGT Asia-Pacific.

Within developed market equities, LGT would buy Japanese equities but these would be hedged against expected weakness in Japanese yen and global IT stocks.

“The Bank of Japan (BOJ) will have to weaken the yen further if it is serious about its inflation target – lifting Japanese equities in the process. This will not be easy now that value has emerged in the yen but the BOJ remains committed and this is something which comforts us,” Corry comments.

LGT believes German and EU equities are undervalued compared to other developed equity markets particularly the US. “US investors have capitulated out of EU equities in recent times, rendering EU equities exceptionally cheap in relation to the world. Among others, the German DAX index looks particularly a good value in relation to all other EU equity markets,’’ he observes.

The private bank expects EU equities to move sharply higher when the European Central Bank’s (ECB) quantitative easing (QE) programme takes place since economic data releases have surpassed initial expectations. It believes this is a macro development that has not been reflected in current valuations.

In addition, LGT also deems that earnings on EU equities will be higher in 2015 on the back of lower oil prices, lower euro-to-US dollar exchange rates and lower borrowing costs.

On emerging market (EM) equities, LGT’s favourite contrarian position is to recommend a buy on Chinese equities as it bets on more easing from the government to uphold the growth momentum in the world’s second biggest economy and maintain an attractive valuation of its market. This is the second straight year that LGT has taken this position. In 2014, Chinese equities were the only contrarian trade for LGT.

“For many years, Chinese stocks looked dead in the water as equities lost out to property and wealth management products. Although the Shanghai Composite index has gained over 50% in 2014, we still believe that fund managers are still underweight Chinese equities. A Chinese hard landing remains a real concern among institutional investors although we do not think one is likely. Despite strong gains in 2014, however, we have decided to run with a contrarian buy call on Chinese equities for a second year running as additional easing still looks likely,” Corry explains.

For other EM equities, it likes dividend growth stocks particularly in India, the Philippines and Taiwan.

When it comes to sectors, LGT points out that growth is under-priced, making it stay with the cyclicals in the banks, an investment idea which slightly underperformed in 2014.

“We have an allocation to India, it’s primarily because we’re expecting economic reforms to come through. The problem with India is it’s always been an underinvested country. Inflation has already come down. I think the potential for Indian equities is quite good plus its banking sector is very liquid as well,” Corry says.

He notes that the Philippines is a similar story although its equities are currently trading at high earnings multiples. “But it’s a market where when you see weakness, you should buy,’’ he advises.

Taiwan equities was also cited by Corry as a highly under-appreciated asset class that has been neglected by investors for the past 10 years. One of its strengths is its liquid banking sector. In 2015, it is expected to benefit hugely from lower commodity prices.

In terms of bonds, LGT prefers senior loans to other types of fixed income assets as deflation is a bigger concern than inflation in 2015.

LGT still sees value in US high yield corporate bonds although it believes that senior loans could offer an attractive alternative with its lower energy exposure and up-in-capital structure (should bond defaults occur).

In addition, monetary policy stances among the global major central banks – the ECB, BOJ, People’s Bank of China as well as the Federal Reserve – are important considerations for investors in 2015.

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