Investing

Despite worries about the US and European economies there are pockets of opportunity in which to invest – and not just in the most obvious places. Some would have you believe that Japan is the new safe haven in the developed world – but that’s quite a surprise to the Japanese: their their national debt stands at 200 per cent of gross domestic product,

Even Asia outside Japan, the bold new hope for global growth, faces major challenges. In China, the discussion is about whether the country will face a hard or soft landing – either way it means a decline in growth.

And booming economies such as Indonesia, India and Vietnam risk being undermined by runaway inflation – no joke when you have much of your population hovering on the poverty line. Inflation annoys us when it puts the cost of our petrol up. When it increases the cost of rice beyond what your family can afford, that’s not annoying; it’s a prompt for desperate social unrest.

So should we all stay at home in Australia’s relatively robust economy? The prospects here are pretty good. And yet . . .

Back to the future

Think back to 2009. The people who made real money – you probably know a few of them – were those who put money into sharemarkets when things seemed darkest. They caught the bottom – or close enough to it – and then shared in the rebound. This is how contrarian investors think.

Given our Australian dollar today buys more overseas shares than it ever has, should we be looking to position ourselves for an improvement in world markets?

Bruno Lee, who heads regional wealth management for Asia-Pacific at HSBC, sees reasons to be positive.

“As the global economy recovers, stockmarkets still have further upside, although continued volatility may discourage investors,” he says. “Undemanding valuations, strong liquidity and reasonable earnings growth forecasts provide a favourable backdrop for equities.”

In a market like this, he suggests buying high-dividend stocks to provide regular income in uncertain times.

“The important thing about stockmarket investing is to buy low, sell high,” he says.

“However, many investors simply follow the herd and get into the market when prices are on the high, or nearing the highs.”

Follow the big banks’ lead

“I find it hard to get excited about any of the major advanced countries, but would prefer Japan (on valuation grounds) and the US (because the Fed will do whatever it takes to keep the recovery going) over Europe (where policymakers are in denial about the size of the problem),” says AMP Capital Investors’ head of investment strategy and chief economist, Shane Oliver.

It’s always instructive to see what the global private banks are telling their clients at a time like this. Citi Private Bank, for example, is telling its clients to be overweight Japanese equities and – this seems surprising – has upgraded its suggested holding in European and US bank stocks from zero to neutral.

“Financials have been too smashed up for now to be comfortable having none,” the bank told clients in August.

But the overall message is one of volatility and uncertainty. “Is it any wonder that investors have decided to sit on the sidelines until the return to the market of conviction, consensus and clarity?” asks John Woods, chief investment strategist for Asia at Citi Private Bank.

Increasingly though, fund managers are sensing that declines in developed markets add further reason to rebalance towards Asia.

Asia’s fundamental strength

“The financial crisis showed the weakness in the leveraged economies of the developed markets,” says Kerry Series, chief investment officer of Eight Investment Partners, which specialises in Asian equities (but was excluded from the accompanying Morningstar screen because its track record is less than three years).

“And it showed the strength of the capital surplus countries, of which Asian countries remain at the forefront. Investors globally are quite nervous about investing in equities, but as they become less nervous, Asia will get a larger share [than it usually does] because of the fundamental strength of Asian economies.”

One problem with Asian equities is that no matter how robust their economies look, international capital tends to flee their markets when there’s a global macro problem, which means Asian markets fall even when it’s illogical for that to happen. This is because Asia-Pacific is equivalent to just 6 per cent of the MSCI Developed World Index.

“When investors change their attitude to risk, it’s going to be marginal stockmarkets that perform better or worse,” Series says.

“Asia is only now developing the institutional investment structures that underpin long-term investment in markets.”

So an investor in Asia faces volatility, although arguably a better long-term outcome. Series, incidentally, focuses on two themes in particular: Asian consumption growth, best reflected in consumer stocks; and fixed asset investment as a consequence of urbanisation, which benefits resource stocks.

“Fundamentally, Asia is in far better shape and it should be favoured on a medium-term view,” Oliver says.

Don’t forget the currency

Investors contemplating international shares should keep in mind the currency. The Australian dollar is strong against the US dollar and has also risen against more or less every major currency, although to a lesser degree.

This is relevant to international investment in two ways. One is you get more for your money. The other is what happens to the currency next is crucial. If the Aussie dollar falls again, your overseas investments will improve in value. If it climbs, the reverse will happen and gains will be negated – as any investor in gold in the past year knows.

Many investors may prefer to buy a product that is hedged (neutralising the currency impact) or actively managed (the fund manager positions itself to benefit from currency movements).

Not everyone has the stomach to invest in such uncertain markets, and not everyone should. But as sure as night follows day, someone will be making money out of all this.