J.P. Morgan's Equity Strategy (Sept 2011)

On Sept 7, J.P.Morgan came out a report titled "Global Markets Outlook and Strategy". Here, we would like to share the equity strategy written, which we think is the most sought after reference for investors to strategize during this uncertain times. Below is the excerpt from the said report:

"We believe perceptions of a US recession will continue to weigh on equity markets and we thus keep a low amount of risk in our equity portfolio and reduce beta to negative."

"The most likely positive catalyst for equity markets in the near term lies with US economic data. This is not happening yet. Our US Economic Activity Surprises Index remains in negative territory, where it has been for 5 straight months (Chart 1). We need to see this index moving to positive territory, and US economic data surprising on the upside, for equity markets to sustain a recovery."

2 reasons why Under-performance

The August market slump saw emerging market (EM) equities and small caps under-performing, exhibiting their traditional high beta during recessions or crises. There are 2 reasons for this under-performance.

1. During expansion and market rally phase, investors became overweight the assets with the highest beta. The economic turnaround then forces them to get back to neutral, inducing more selling in EM and small caps.
2. Small caps and EM are both less liquid markets, amplifying the impact of a given amount of selling. This happened even in periods when the crisis emanated clearly from developed markets and not from EM. The beta, position, and liquidity forces dominated the source of the crisis in driving relative performance.

The Strategies...

Rule-based trading strategies tend to perform better in highly uncertain environments. We take more risk on these strategies:

• A US equity sector trading model based on a combination of sector short interest, a contrarian indicator and 11-month return momentum suggests staying long in Energy and Materials vs. Financials and Staples.
• Our Cyclical vs. Defensive global sector trading signal based on the monthly change in global PMI is currently recommending an UW in Cyclical vs. Defensive sectors.
• Our EM vs. DM equity signals based on relative IP growth and 2-month return momentum are currently neutral in EM vs. DM equities
• Our model for allocating between the US and Euro area equities currently suggests a long in US vs Euro area equities currently hedged

Why chose ASEAN economies vs. China?

• ASEAN countries are in a sweet spot with inflation below the central bank target zone, strong currencies and healthy growth. Emerging markets for now are a non-BRIC story.
• We see a high risk of disappointment in China. The consensus view is that growth is the priority. But with wage inflation signaling healthy employment conditions and public concern about the rising cost of living we see a high risk that policymakers focus on price stability rather than growth.
• China's 2Q fixed asset investment (FAI) to GDP ratio was 53%. The re-acceleration in 2H11 growth is based on affordable housing and FAI projects. The result is FAI to GDP above 60%, a level that could result in more overheating.

UW: Underweight

OW: Overweight

New Fund: AmASEAN Equity Fund

If Singapore and Malaysia market only is not enough to feed your appetite, then you may consider the whole ASEAN markets. ASEAN was being targeted by international investors again since the 1997 Asian financial crisis given its high growth rates and more stable economy.

AmASEAN equity fund seeks to provide capital growth over the medium-to-long term by investing 70% to 98% of the fund's NAV will be invested in a diversified portfolio of equities and equity-related securities which are Shariah Compliant, issued by companies listed in the ASEAN countries, and including securities listed in non-ASEAN countries but with their core business in the ASEAN markets.

Core business in this respect means the major business of the company, where majority of the company's revenue (at least 50%) is derived from the ASEAN countries. ASEAN member countries comprise of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

Investment Criteria or Strategy:

• Above average growth potential
• Undervalued stocks relative to its earnings growth potential and/or its fair value
• Combines top-down asset and sector allocation process with a bottom-up stock selection process
• Active asset allocation strategy depending upon the equity market expectations
• Stock selection based on improving fundamentals and growth at reasonable valuations

Source: AmMutual

Click here to download prospectus

Bursa Malaysia to take on ASEAN

Yesterday, news portal reported that Bursa Malaysia (BM) together with Singapore Stock Exchange (SGX) and Stock Exchange of Thailand (SET) are set to join the Asean Exchange Linkage which will go live by the 2nd half of 2011.

In addition to the linkage, the exchanges would also promote leading Asean public companies under the brand of "Asean Star". The cross-border offering of collective investment scheme would kicks-in after that.

Migration of local investors?

In fact, many local investors are already trading overseas shares, especially Singapore and Hong Kong markets. For them, this made no significant difference, except that the new cross-border trading will reduce the lagging time, thus, boosting the participation and matching rate. If the overhead costs of trading is reduced accordingly, investors will be more reluctant to trade. Anyway, investors can diversify more effectively to regional markets soon.

Brokers do not "broke" anymore?

Local brokers are expecting a revival of the industry, last seen in the 90s. Reportedly, all local stock broking firms would be given the green light to link with the new platform. But, brokers would need to monitor regional markets too, with more than few thousands counters!!!

What is the impact to Bursa Malaysia?

Of course, Bursa Malaysia could benefit from the cross-border trading with increase revenue generated, up-lifting the profile of local market, making it more attractive and vibrant. However, I scared local investors would in turn, shunning the local market in favor of regional markets.

Weathering the storm together...

After all, we will stick together more closely, and shoulder the good and bad times together. This is because, investors are becoming more regional, and a fall in one market would most likely going to trigger a fall in another market.