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Star Ratings Review For 2Q 16: Ratings Lowered For US, Europe and Brazil
July 12, 2016

As we move into 2H 2016, we review our star ratings at the end of 2Q 2016 having previously adjusted our ratings on US, Europe and Brazil.


Author : iFAST Research



 Top Markets 1H 2016: Markets Shrug Off Brexit Blues

Ratings Changes

On 28 April, we downgraded the three equity markets of US Europe and Brazil, with the two major regional markets being downgraded by 0.5 Stars each despite having been just upgraded on 12 February this year. Following the strong rebound since our upgrade of the US and Europe equity markets on 12 February, valuations for the US and Europe had risen almost as briskly as they had fallen given the local stock markets had rallied by +11.3% and +12.6% respectively between 12 February and 28 April 2016 in local currency terms. On top of a rising market, estimated earnings had failed to follow the upward trajectory of prices, causing valuations to rise slightly more than prices, and seeing valuations premiums creep back in. We currently have a 2.0 Star “Unattractive” rating on US, equities while Europe is rated 2.5 Stars “Neutral”.

In addition to the two major regional markets, we downgraded Brazil on 28 April following the alleviation of political uncertainty given the on-going impeachment of Dilma Rousseff and the rise of commodity prices. The domestic Bovespa index has staged a strong comeback, gaining +45.3% in the space of three months (26 January 2016 to 27 April 2016). The surge in prices saw valuations rise for Brazilian equities, significantly reducing its upside potential through end 2017 and warranted us to downgrade its rating from 4.0 Stars “Very Attractive” to 3.0 Stars “Attractive”.

As of end June, while select risk assets around the world have been hit by the result of the UK’s EU referendum, valuations have not posted a sufficient fall to warrant the upgrading of any market thus far. In addition, more time is needed for clarity for the medium to longer term effects the result of a Brexit will have on the various economies and financial markets. No further changes have been made to the Star Ratings of the markets we currently cover.Table 1 shows a summary of our star ratings on each market, including the latest changes.

Table 1: Changes in Star Ratings

Markets

Star Ratings

Our 3 year view

Emerging Markets

5.0

Very Attractive

Asia ex-Japan

5.0

Very Attractive

Europe

2.5 (3.0)

Neutral (Attractive)

US

2.0 (2.5)

Unattractive (Neutral)

Japan

3.5

Attractive

 

 

 

Single Country markets

Star Ratings

Our 3 year view

China

5.0

Very Attractive

Hong Kong

5.0

Very Attractive

South Korea

4.5

Very Attractive

Taiwan

4.0

Very Attractive

Russia

4.5

Very Attractive

Singapore

4.0

Very Attractive

Brazil

3.0 (4.0)

Attractive (Very Attractive)

Malaysia

3.0

Attractive

Thailand

2.5

Neutral

India

3.5

Attractive

Indonesia

2.5

Neutral

 

Source: iFAST Compilations
Data as of end June 2016

Which Are The Most Attractive Markets Under Our Coverage?

In contrast to the loftier valuations for developed market equities, select Asian markets continue to sport low valuations, having been shunned by global investors. As shown in Table 2, our 5 star rated markets all sport significantly strong upside potential (by end-2017), and all currently trade at valuations which are below where we think they should be, which means that the valuation expansion component should be expected to contribute meaningfully to each market’s return over the next few years.At this juncture, we suggest that investors overweight the cheaper markets of Asia ex-Japan vis-à-vis their more expensive Developed market counterparts.

Table 2: Forecasted Returns For Selected Markets (End-2017)

Market

Earnings Growth

Valuation Expansion

Dividend Yield

Total Return (end-2017)

Star Rating

China

5.9%

26.9%

3.5%

39.0%

5.0

Hong Kong

3.6%

20.3%

3.9%

29.5%

5.0

Singapore

1.8%

16.6%

4.1%

23.6%

4.0

Asia ex-Japan

5.9%

8.9%

2.8%

18.6%

5.0

Emerging Markets

11.6%

1.1%

2.9%

16.1%

5.0

Japan

4.9%

5.7%

2.2%

13.3%

3.5

US

8.6%

-11.0%

2.3%

-1.1%

2.0

Europe

6.3%

-6.5%

3.9%

3.2%

2.5

Source: Bloomberg, iFAST estimates
Data as of 30 June 2016

Our Current Global Asset Allocation Strategy

Given all that we’ve seen in markets year-to-date, a neutral equities vis-à-vis fixed income stance is still appropriate at this juncture given the valuations in various developed markets equities, which have fallen but are not attractive to us yet. Our suggested asset allocation for 2H 2016 can be found in Table 3 below, and continues to see us remain diversified and disciplined, with allocations across the various segments of equities and fixed income.

Table3: Asset Allocation For 2H 2016

Fixed Income Portion

Weight

Singapore/SGD Bias

25.0%

Global Bonds

20.0%

Asian Bonds

25.0%

Emerging Market Bonds

10.0%

High Yield Bonds

20.0%

 

 

Equities Portion

Weight

US

22.5%

Europe

22.5%

Japan

7.5%

Asia ex Japan

30.0%

Emerging Markets ex Asia

17.5%

Source: iFAST
Data as of end June 2016

In a disciplined portfolio allocation process, we maintain that investors should have exposure to all major regional markets for proper diversification, so there is little for most investors to do except to consider switching some of their developed market exposure into Asia ex-Japan or the Emerging Markets. While we find Asia ex Japan equities more attractively valued, we are cognisant of the risks the world is currently facing today and do not believe it warrants an over-weight in equities at this juncture.

The fixed income asset class has continued to do well, which also means that yields have fallen broadly across most fixed income segments and offer investors lower expected returns moving forward. While we are neutral equities vis-à-vis fixed income, we continue to emphasise that it does not equate to a more positive stance on fixed income given the level of yields on offer and the monetary policy environment we are in today.

If 1H 2016 was a sign of things to come, 2H 2016 is likely to keep us on our toes. Volatility will likely see opportunities emerge and provide some interesting investment prospects in the months ahead that will allow investors to invest globally and profitably.

The Research Team is part of iFAST Financial Pte Ltd.


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.



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