Global equities near fair value, says analyst

(June 8, 2005) Investors looking for under-priced investment opportunities have their work cut out for them, as most of the equity markets in developed economies are already at fair value, according to an expert on asset allocation.

There are still some good opportunities available, says Edwin Denson, executive director and senior asset allocation analyst for UBS Global Asset Management, but investors have to know where to find them.

“Despite the fact that we think global developed equity as a whole is at fair value, we do think there are some opportunities, mainly within Europe,” he said in a recent conference call, hosted by BMO Mutual Funds. “We see U.K. equities as a market, Belgium, Netherlands and Ireland are all markets that are attractive.”

He says emerging markets offer more opportunity, but that this asset class again requires geographic distinction. “There is residual value in emerging market equity, in particular, we prefer south-east Asia in that asset class. We see Latin American equities as pricey.”

Latin American equities have been strong performers so far this year, driving the region to the top of Morningstar Canada’s fund index performance tables. The year-to-date return on the index was 9.7% by the end of May.

While equity investors need to be picky to find securities, Denson says the fixed income markets are virtually devoid of good value. Global bond markets are over-valued across the board, not only for high-quality government issues, but among inflation-indexed securities, emerging market debt and even U.S. high yield debt.

“Yields are too low and credit spreads are too tight across the board. We don’t see any opportunity anywhere on a top-down basis,” he said.

Despite repeated rate hikes from the Federal Reserve, investors continue to bid up both short and long bonds — yet another “conundrum” in the eyes of Fed chairman Alan Greenspan. But Denson say the credit-tightening cycle seems to be drawing to a close.

“We’ve gone from the market viewing the Fed as leading a global tightening cycle in terms of monetary policy, to a paradigm where the market thinks the Fed is almost done and is pricing in easing by other central banks in other parts of the world.”

While rate cuts are usually associated with a weakening economy, he says global growth is seen supporting both corporate earnings and debt service costs.

“We think we’re seeing the economy slowing from what were above-trend rates of growth, induced by the Fed easing we saw a few years ago, back to a more trend like rate of about 3%,” Denson said. “As that happens there are bumps and hiccups, fits and starts. We’re pretty confident about the U.S. just slowing to more trend-like rates of growth, rather than falling into a recession and the same thing holds true for our view on the global economy.”

On the currency markets, he says the U.S. dollar is now attractive against the euro, pound, Australian and New Zealand dollar. Against the major currencies of the Asia-Pacific market, though, the dollar remains over-priced.

The U.S. government has been pressuring China in particular to allow its currency to float more freely. The renminbi is currently pegged to the American dollar at what the U.S. says is an unfairly low exchange rate, which distorts trade between the two nations.

If the U.S. is expecting a change in the near future, they shouldn’t hold their breath, according to Shifeng Ke, director and co-manager of BMO Greater China Class.

“We think in the longer term, the Chinese currency will be gradually appreciated, but in the short term we believe the strengthening of the U.S. dollar has eased pressure for China’s government to appreciate the currency,” he says. “China will not float the currency completely overnight. They are not going to be forced to do something, when they are faced with pressure.”

He says China’s domestic challenges, including high unemployment and social problems, force the government to maintain its high growth rate, which is spurred in part by the cheap renminbi.

“We believe the Chinese economy will continue to grow at a reasonably fast pace. We believe the GDP growth will be around 8.5 to 9%.

He says the renminbi will likely be “de-pegged” from the U.S. dollar and be “re-pegged” to a basket of foreign currencies

Meanwhile Chinese interest rates will likely remain steady for the foreseeable future, as inflation seems to be largely under control, despite rapid growth.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(06/08/05)

Steven Lamb