As the credit crunch has had ripple effect across the global economies, global markets have endured dramatic gyrations since this year. While the US and Europe are inevitably facing either a sharp economic slowdown or a recession, Marino Valensise, chief investment officer at Baring Asset Management, believes there are positive structural changes taking place in Asia which will help the region to weather the stormy situation.
Valensise comments: “We believe we are seeing the ‘end of the beginning’ of the crisis, with the financial stress leaving space to the problems which “main street” will have to face next, particularly in the US, Europe and the UK.”
However, there are still investment opportunities to be found in this environment when you take a longer-term perspective. Asia continues to offer investment promise as personal consumption helps to fuel growth, making the role of the Asian consumer crucial to the world. China is particularly interesting, having fallen around 60 percent since this year. Chinese equities carry attractive valuations and may benefit from decisive action from the Chinese authorities, which may want to support the economy and the markets. Many fiscal and monetary policy options are available to them.
Talking about the financial sector, Valensise explains that banks do not trust each other in this environment, and liquidity in the inter-bank market, the credit default swap and over-the-counter markets is dire. He thinks that there is a need for Central Banks to step up to the plate and play a more active role at times like this. By acting as intermediary or guaranteeing all money market flows, where legislation permits, they could bypass concerns about counterparty risk, and keep the economy ticking over until the situation stabilises.
Valensise points out that strong leadership and vision has been lacking amongst policy makers. ”The European market could go in the same direction as Japan in the early 90’s unless the ECB moves fast on monetary policy instead of raising the issue of inflation while we all know that inflation will fall down like a stone in the next few months,” says Valensise. In terms of extraordinary measures, Valensise says that European leaders have so far been “missing in action” and more decisive measures are needed.
In the current market, there has been a shift in the drivers of equity prices. “In the current environment, fundamental factors do not determine out-performance. Technical factors are increasingly important as debt maturities drive credit and stock performance,” says Valensise.
Also, redemptions from hedge funds is putting pressure on stocks in which these funds carried long positions, as they need to raise cash. Similarly, stocks in which they held short positions may benefit. Examples from the recent days are Potash Corp (long) and Volkswagen (short).
Marino Valensise will be speaking with Henry Chan, the Head of Asian Investment Team at a Barings conference in Hong Kong on 16 October 2008. They will share their views on the current market situations and investment ideas to help smooth out volatility.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Investment Asia. The author was not remunerated for this article.
Do you know more about this story? Contact us anonymously through this link.