Sunday, July 27, 2008

Time to go bargain-hunting Merrill Lynch strategist sees opportunities in market selloffs

writes Umesh Pandey

As global markets continue to remain in the doldrums, economists and strategists are recommending that investors watch out for signs of possible turnaround in order to be able to start scooping bargain buys before it is too late.

''What I would recommend investors to watch out for is to start to put a small part of their earnings into an investment portfolio and hope that the markets will bottom out over the next couple of months,'' said Stephen Curry, director and head of investment strategy for managed products at Merrill Lynch's Hong Kong branch.

''There may be very limited downside risk remaining in the market at the moment as the United States is already in a recessionary phase and our house view is that things in the US would start to pick up after the first quarter of next year.''

Although there is no guarantee that a turnaround will come, he says that fishing around for some bargains is not a bad option. He recommends investors spread their planned investments over a period of time in order for them not to be caught in a downward spiral such as investors are now witnessing.

Most Asian markets have taken a plunge over the past couple of weeks amid fears soaring oil prices would derail economic growth that has already been shaken by a slowdown in the major developing countries as most Asian countries have been relying on exports to spur their economic growth.

With Asian markets being hurt the most from soaring oil prices and uncertainties in the global market, most investors in this part of the world are becoming risk-averse after enjoying years of robust consumption-driven economic growth in the United States.

The US, according to Mr Curry, has managed to create around $600 billion annually from growth that was consumption-driven, but the fallout in global markets has so far wiped out close to $5 trillion in valuations, and more can be expected.

''If we think that the pain in the US is nearly over, then our view is that it is still there at least until early part of next year, although there are some encouraging signs that things are looking brighter,'' he said, adding that one of the brightest aspects is the gradual decline in oil prices.

Merrill Lynch's view is for oil to peak at $150 a barrel this summer after already reaching $147.27 three weeks ago. Mr Curry thinks that in time the price will settle around $107. Once it reaches this level, the next step is for inflation to be tamed and this could be done though various means as oil prices slip back.

Then he sees an aggressive easing of monetary policy to kick-start global economic growth.

''What we would need to see is an easing of interest rates especially by Asian central banks,'' he said.

Mr Curry acknowledged most Merrill Lynch clients are holding on to cash but opportunities arise once the market bottoms, and being overweight in cash should not be that bad an option.

According to him, a so-called Swedish method to handle the financial crisis in the US would likely result in a faster-than-expected recovery, as is evident from the actions of the Federal Reserve in the United States.

The Swedish method consists of carving out banks' good and bad assets and then managing the good assets with the bad assets managed by a separate entity that acts similar to an asset management company.

The other method is the Japanese way, in which the state bails out every bank and does not let anyone go under, no matter how bad their assets are.

The Swedish method could result in the banking system returning to health in a few years and that would be good for the market, Mr Curry adds.

What is a good investment?

According to him, good investments are those that anticipate inflation, meaning commodities and gold, which are good hedges when there are economic uncertainties.

Where does one invest?

One of the best markets that offers good returns in the region is Thailand as the country is trading at low price-to-earnings multiples, and has an earnings growth story, he said.

Others are the Philippines and China, both or which have been hammered over the past few months.

There are markets where he recommends not investing, namely Australia, India and South Korea: Australia because it is much in the same state as the United States and United Kingdom, with a saving grace of higher prices for commodities, its key exports. India, on the other hand, has oil subsidies and high valuations and continues to remain very dependent on oil. South Korea is very much linked with the US economy.

When does one invest? Once one sees that rates have peaked and there could be a possible cut coming, then that is the time to accumulate, Mr Curry. And he says that it is not far away, at least not in the western hemisphere where the European Central Bank is set to raise rates by at most another 25 basis points, and the Bank of England has already started to hold back its rates.

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