Presentation on theme: "1 Investment Outlook 2001 Daniel Chan Managing Director & Chief Investment Officer UOB Asset Management Ltd."— Presentation transcript:
1 Investment Outlook 2001 Daniel Chan Managing Director & Chief Investment Officer UOB Asset Management Ltd.
2 Investment Outlook 2001 Contents -What Happened in The Issues in Base Case Investment Scenario -Outlook & Strategy -Global Bonds -US Equities -European Equities -Japan Equities -Asia ex-Japan -Singapore -Conclusions
3 What Happened in Correction in the technology / telecom sector. 2.Tightening of US monetary policy. 3.Slowdown in US economy. 4.Sharp revision of corporate earnings. 5.The Euro “tanked”. 6.Spike in oil prices. 7.Asia equities did especially poorly.
4 NASDAQ Ruled... Optical coys revise up earnings guidance after strong Q4 00 results Semiconductor and telecom eqpt coys report robust bookings UK UMTS licence auction ends - investors fear telcos overpaid Liquidity in high yield financing evaporates causing bankruptcies amongst US emerging telcos SSB’s Jonathan Joseph calls an earlier end to semiconductor growth cycle Nokia lowers Q3 margin expectations - investors fear slowdown in cellular handset demand Baron's publishes article on excessive vendor financing - fears of CLEC default on loan repayment resurface Tech stocks correct on fears that telcos cut back in CAPEX will hurt tel eqpt food chain Intel pre- announces lower than expected results for Sep quarter US mutual funds tax loss selling pressure takes effect Cisco reports build up in inventory Nortel reports inventory build up at US telcos Apple reduced Q1 01 earnings guidance German UMTS licence auction ends - investors fear telcos overpaid Source: UOBAM
5 Fed Rate Hikes Feb 25 bp hike 21 Mar - 25 bp hike 16 May - 50 bp hike Source: Bloomberg
6 Fed Rate Hikes + Earnings Growth
7 Source: Soc-Gen
8 Oil Price Rose Source: Bloomberg
9 Asia Equities Did Poorly Source: Goldman Sachs Portfolio equity flows into Asia Investments were flowing out of Asia dedicated funds.
10 How the stock markets performed last year What Happened in 2000 %
11 MSCI Far East Free Ex-Japan Source: Bloomberg
12 Investment Opportunities in 2001 Source: MSDW Down markets create opportunities...
13 The Issues in Will there be a hard landing ? -Have the TMT sectors bottomed ?
14 The Issues in 2001 Will there be a hard landing ? The case for : –Negative wealth effect –Investment boom (especially IT) over –Consumer is tapped out –Corporate debt build-up
15 The Issues in 2001 Will there be a hard landing ? The case against : –Room for interest rate cuts –IT and other technological investment still needed in a fiercely competitive environment –Other policy options available (tax cuts, fiscal stimulus, US dollar weakens) –US economy remains highly competitive
16 The Issues in 2001 For a HARD LANDING scenario to happen, these must happen: -Core inflation rises rapidly, preventing a relaxation of monetary policy, -Wage rise (labor costs) outstripping productivity growth, -Oil prices skyrocketing out of control, -Extreme risk aversion spreading to investment grade credits, -Occurrence of an unexpected and contagious event risk that results in confidence flight. Our conclusion is that the odds of this happening is smaller than that of a SOFT LANDING.
17 The Issues in 2001 The Fed and the other central banks have room to cut interest rates...
18 The Issues in 2001 Have the TMT sectors bottomed ?
19 Nasdaq Price Chart (1975 – 2000, logarithmic scale) Between 1980 and 1990 : Index up +84.8% Between 1990 and 2000 : Index up % PE of NASDAQ Composite : 101.8x Have the TMT Sectors Bottomed ?
20 Nasdaq Price Chart (1975 – 2000) Between 1980 and 1990 : Index up +84.8% Between 1990 and 2000 : Index up % PE of NASDAQ Composite : 101.8x Have the TMT Sectors Bottomed ?
21 Source: MSDW (Jan 01) US Tech sector PEG (Fwd EPS) against US broad market US technology sector is attractive relative to the broad market US Tech PEG 1.22x vs S&P 500 PEG 1.50x Have the TMT Sectors Bottomed ?
22 The NASDAQ Now closer to fair value Source : Datastream Have the TMT Sectors Bottomed ?
23 The tech bubble in perspective.. Source : The BCA Have the TMT Sectors Bottomed ?
24 Valuation Statistics for Top 20 companies of NASDAQ 100 Have the TMT Sectors Bottomed ?
25 Valuation Statistics for Top 20 companies of NASDAQ 100 Have the TMT Sectors Bottomed ?
26 TMT Valuations - US US 2001Price/Expected EPSImplied EPS Companies PERBookgrowth (00-05)growth (00-05) Worldcom %7.5% Nortel %20.5% Corning %22.2% JDS Uniphase %24.5% Sun Microsystems %16.0% EMC %26.0% Microsoft %23.0% AOL Time Warner %21.0% Intel %8.0% PMC Sierra %17.0% Broadcom %32.0% Applied Materials %1.0% Broadvision %24.0% Yahoo %28.2% Prices as of 5 Jan 01
27 TMT Valuations - Europe Europe2001Price/Expected EPSImplied EPS Companies PERBookgrowth (00-05)growth (00-05) Nokia %22.5% Alcatel %15.2% Autonomy %35.3% Vodafone %24.8% Deutsche Telekom %16.7% France Telecom %8.1% Prices as of 5 Jan 01
28 TMT Valuations - Japan Japan2001Price/Expected EPSImplied EPS Companies PERBookgrowth (00-05)growth (00-05) Murata %12.0% Tokyo Electron %10.0% NTT DoCoMo %9.0% Fujitsu %19.0% Trend Micro %19.0% Sony %12.5% Net One Systems %15.5% Nippon System Development %21.5% Prices as of 5 Jan 01
29 TMT Valuations - Asia ex-Japan Prices as of 5 Jan 01 Asia2001Price/Expected EPSImplied EPS Companies PERBookgrowth (00-05)growth (00-05) China Mobile %18.0% PCCW %22.0% Korea Telecom %11.0% SK Telecom %15.0% Taiwan Cellular Corp %-6.0% Infosys %50.0% Gul Technologies %-10.0% Venture Manufacturing %11.0% TSMC %5.0% HK TVB %15.5%
30 Base Case Investment Scenario 1.A soft landing for the global economy - with the slowdown led by the US. 2.Inflation to remain subdued. 3.Interest rates to fall in Oil prices to stabilize at current levels.
31 Expect lower rates... Bond Market Outlook
32 Credit spreads are attractive... Bond Market Outlook
33 What the Fed Funds Futures are forecasting? US Fed Funds futures are already forecasting almost 1% cut in Fed Funds rate by end Aug 2001 Bond Market Outlook
34 Rates anticipation Bond yields have already priced in a soft landing Unless there is a hard landing, further yield decline would be a overreaction Therefore yields are likely to stay close to current levels unless the economic scenario worsens However, reality tells us there will always be overreaction Bond Market Outlook
35 EMBI+ Spread Index The emerging sovereign spread has widened despite improving fundamentals ……. Bond Market Outlook
36 US Real Yields - Little room to fall Bond Market Outlook Source: Bloomberg
37 Bond yields do not have much room to fall Slightly below benchmark duration Opportunities in good quality investment credits Emerging sovereign credits to outperform high yield corporate bonds Bond Market Strategy
38 Equity Market Strategy 1.At current levels, equities have adequately discounted the risks, and are well underpinned by more reasonable valuations. 2.Stay invested and stay diversified - equities are attractive in a soft landing scenario. 3.Equity market strategy: USUnderweight EuropeNeutral JapanNeutral Asia ex-JapanOverweight
39 4.Sector Strategy -Financials and interest rate sensitive sectors should benefit from lower rates. -Healthcare - the consistent growers, resilient to earnings disappointment. -Technology & Telecom - selective in telecom and tech fallen angels. Equity Market Strategy
40 US Equities - Underweight Economic growth is slowing to a more moderate pace - we are looking for a soft landing for the US economy US companies’ profit growth will also slow
41 US Equities - Underweight Fourth quarter companies’ earnings will be weak, partly hurt by weaker consumer spending And expectations of lower capital spending
42 PER and PEG of US Stocks (S&P 500) US Equities - Underweight
43 US Equities - Underweight Source : SocGen
44 US Equities - Underweight Source : SocGen
45 Mutual fund cash levels have risen back to its mean. US Equities - Underweight
46 No excess capacity outside technology Source : The BCA US Equities - Underweight
47 European Equities - Neutral –Warning signs of a slowdown in the economy
48 European Equities - Neutral –But there is also more leeway for expansionary fiscal policy
49 European Equities - Neutral –More room for looser monetary policy, and Trend Reversal Euro Heading Higher
50 European Equities - Neutral MSCI Europe Stock valuations are not demanding
51 Japan Equities - Neutral Economic growth momentum slowing …. as indicated by industrial production (leading indicator of GDP) slowing down.
52 Japan Equities - Neutral
53 Japan Equities - Neutral “Strategic” Restructuring – More M&As and asset disposal instead of layoffs. But at the corporate level, restructuring continues, which is positive for the market. No. of restructuring announcements Source: HSBC
54 Japan Equities - Neutral Foreigners have been the ones that drove the market. This chart suggests that the market is bottoming. Source: HSBC
55 Japan Equities - Neutral Valuations provide support Going back to valuations, mkt looks cheap Over past 12 years, floor = 35X = 1450 on TOPIX PER lowest 31X in Oct98 =1300 PER levels calculated using one-year rolling forward IBES EPS forecasts
56 Japan has huge catch-up potential Source : The BCA Japan Equities - Neutral
57 Asia ex-Japan - Overweight –Favorable liquidity conditions Healthy current account balance Mild inflation Low interest rates –Increasing trend of M&A and privatization –Prime beneficiary of outsourcing trend –China’s WTO accession in 2001 –Compelling valuations The investment case for Asia ex-Japan:
58 Source: Goldman Sachs % of GDP USEMU11 JapanNon-Japan Asia Healthy current account balance Asia ex-Japan - Overweight
59 Source: HSBC Securities % Yr Inflation under control Asia ex-Japan - Overweight
60 Source: HSBC Securities % EOP, 3M Scope for lower interest rates Asia ex-Japan - Overweight
61 Asia-5* : Loan-to-deposit ratio - Still very low Source : The BCA China Analyst Asia ex-Japan - Overweight
62 Increasing trend of M&A activity across Asia. Expect more M&A transactions to follow, particularly in the telecom and financial services sectors. Privatization within Asia are helping to drive restructuring. Source: Goldman Sachs Restructuring and M&A continue apace Asia ex-Japan - Overweight
63 Slowing US investment may trigger defensive strategies by OEMs - by increasing outsourcing, which benefits Asian Electronic Contract Manufacturers. CAGR (%) Prime Beneficiary of Outsourcing Trend Asia ex-Japan - Overweight
64 Source: Soc-Gen WTO Boosts FDI Inflows China’s accession into WTO offers substantial opportunities for corporate leaders which will lead the consolidation or deregulation of major industries. Asia ex-Japan - Overweight
65 There has been a dramatic shift in market shares among Asian competitors for US imports Source : The BCA China Analyst Asia ex-Japan - Overweight
66 Note: The above numbers are based on Datastream index levels for the respective markets as at 19 Dec 2000 Source: CSFB Forward P/E ratio and implied market performance Forward P/B ratio and implied market performance Earnings yield gaps and implied market performance Asia ex-Japan: Compelling Valuations Asian markets have priced in significant earnings slowdown. Valuations are back to crisis levels although fundamentals remain intact.
67 Source: MSDW, ABN Amro Asia ex-Japan: Compelling Valuations
68 Overweight:Singapore, China & Hong Kong, Korea Neutral:Taiwan Underweight:Thailand, Indonesia, Philippines & Malaysia Investment Strategy Asia ex-Japan - Overweight
69 Asia ex-Japan Stock Picks Asia ex-Japan - Overweight
70 Singapore Equities - Overweight Singapore outperformed the region in the last quarter of Sector performance (relative to STI) OutperformedUnderperformed Properties 5.6% Transportation5.5% Electronics6.1% Financials 0.7% Review Source: Bloomberg
71 Investment Rationale Safe-haven status. High earnings stability (14% earnings growth in 2001 following a high 29% in 2000), low gearing, and still improving ROEs. Good corporate governance. Significant restructuring expected in the banking and conglomerate sectors - this will drive margin expansion and greater capital efficiency. Domestic liquidity is good with interest rates low, the banking sector's loan-to-deposit ratio low and the potential for US rates to fall further. We are overweight Singapore in our Asia-Ex-Japan portfolio. Singapore Equities - Overweight
72 Investment Rationale Equity earnings yield are more attractive than rate of return on alternative investments. Valuations are attractive at current and forward PE multiples of 16x and 14x respectively, with positive earnings yield gap. Singapore Equities - Overweight
73 Investment Risks Political uncertainties in surrounding countries. A significant slowdown in electronics exports to the US. Little room for S$ interest rates to fall as they are already quite low. Source: CLSA Singapore Equities - Overweight
74 Sector and Stock Picks SectorO/U/NStocksRemarks BankingO/WUOB, OCBCDivestment of non-core assets over next 1-2 years hold key to releasing liquidity back into banking system. As local banks focus on search for strategic partnerships or new markets, any positive news is expected to drive up share prices. ConglomeratesO/WSCIOne of the main proponents of corporate restructuring as management strives to improve capital management and focus on delivering shareholder value. Singapore Equities - Overweight
75 Sector and Stock Picks SectorO/U/NStocksRemarks Property - residential U/W }Private residential housing demand } remains anemic. Prices expected } City Devto fall 10-15% this year. - commercial N} CapitalandDemand supply mismatch in office }properties expected to lead to tight }rental market until Technology NElec & EltekPockets of strength in industry Venturewhich is facing lower demand in all its major segments. Prefer companies with strong business proposition (low cost, high quality). Singapore Equities - Overweight
76 Sector and Stock Picks SectorO/U/NStocksRemarks Transportation O/WSMRT,Earnings stream underpinned by Delgrolow base demand for public transportation as well as lower oil prices this year. Singapore Equities - Overweight
77 Strategy & Outlook SECTOR STRATEGY
78 The long run outlook for the financial sector remains positive. However, near term upside potential in the financial stocks is capped by asset quality concerns. Financials Performance vs. Interest Rate Cycle ( ) Financial Services
79 Asset Quality Concerns We recognized that NPAs are creeping up and do not rule out the possibility of a credit cycle. However the situation is in a better condition as compared to the 1991 recession. The strong earnings of the banks over the last few years will enable them to be resilient to the increase in NPAs. Financial Services
80 US pharmaceutical companies earnings hold steady while S&P 500 earnings are coming off. Defensive sector and stable earnings growth Healthcare We are here Source: SalomonSmithBarney
81 Healthcare stocks outperform when its growth rate surpasses the market. Source: SalomonSmithBarney Note: Bars represent the difference in growth rate between the pharmaceutical sector and the S&P 500 Healthcare We are here
82 Still Positive on Healthcare: –Secular outlook also intact, –driven by the aging global population, –rising health care spending and –technological advances. Healthcare
83 Technology/Telecom Lower earnings visibility in general for 2001 –Downgrades should continue into H1 01 –Demand / supply imbalance biased against demand Telecoms sector over-geared –Credit problems may worsen for telecoms –Pricing pressures hurt fixed line operators –Mobile operators face increasing competition Tech sector growth intact albeit slower pace –Further CAPEX cuts expected –Increased vendor financing raises concerns over credit quality
84 Source: MSDW (Jan 01) US Tech sector PEG (Fwd EPS) against 10yr mean US Telecoms sector PEG (Fwd EPS) against 10yr mean Valuations begin to look attractive Current PEG 1.22x vs 10yr mean 1.23xCurrent PEG 1.74x vs 10yr mean 1.62x Technology/Telecom
85 Technology/Telecom Long term growth trends still intact –IT spending will remain an important driver of productivity –Broadband growth will accelerate –Alternate internet access devices becoming more widespread –Outsourcing trend will pick up
86 Investment Outlook - Conclusions I –Base case scenario - soft landing of US economy but risk of recession not insignificant. –TMT sector bottoming out but some areas still vulnerable. On the other hand, certain stocks looking very attractive. –US dollar has likely peaked against the Euro. –Japanese recovery stalling and risk of recession increased.
87 Investment Outlook - Conclusions II –The economic outlook is cloudy but unlikely to be disastrous. –Forecasting economic conditions is difficult enough. Even more difficult is predicting how markets will behave. –Therefore, focus on long term investing and stock selection. –Fundamentals and valuation do matter.
88 Investment Outlook 2001 OUR CONCLUSION - A BETTER 2001.