Asia Investment ViewPoints

05/04/2011 Compass April 2011 – Investing in a resilient recovery 17/03/2011 The Japanese earthquake and its global impact 18/08/2010 Sayonara Japan………..ni hao China? 20/07/2010 Global Reach – Consider Korea? 04/09/2009 Renewed hope for Japan?

 

5 April 2011 - Compass April 2011 – Investing in a resilient recovery

 

This week’s Investment ViewPoint summarises the most recent edition of Compass, the monthly investment research publication from Barclays Wealth. The four main themes identified for April are: the terrible events following the earthquake and tsunami in Japan, unrest in North Africa and the Middle East, sovereign debt concerns in Europe and the changing interest rate landscape in Europe and the US.

Japan

Some of the damage done to Japan since the earthquake and tsunami of 11 March is irreversible. The loss of human life is devastating and the prognosis for nuclear power in the region is still to be determined. However, our experts would not place the economic prognosis for Japan in the same category. As discussed in a previous Investment ViewPoint – The Japanese earthquake and its global impact – Japan is a resilient nation and will no doubt undergo an incredibly effective and convincing recovery from this natural disaster.

In addition to the uncertainty that investors feel when events unfold extremely quickly (as they have done during this situation), Compass details three very specific effects – “the viability of nuclear energy will be questioned again; the global insurance sector will see its profits hit hard; the Western central banks may be a little slower to act on official interest rates than seemed likely, at least in Europe…”.

Events in North Africa

Events continue to unfold in Libya and Compass again states that “the human and political significance outweighs the likely economic impact”. Oil prices remain volatile but the commodity is relatively stable, given the political control in Saudi Arabia. As the largest provider of oil to the Western world, the importance of that stability cannot be overestimated. On a slightly different tack, it would be advisable for investors to keep an eye on events as they unfold in Bahrain. If the West is forced to intervene, that could be damaging to what is currently a strong economic relationship.

Sovereign debt in Europe

There remains a visible risk to European sovereign debt although politicians are now beginning to build “a more unified fiscal framework that has been missing from the euro architecture since its inception”. The economic circumstances in Europe continue to unnerve investors and are a destabilising force in the global recovery.

Global interest rates

Compass states that “the outlook for official interest rates is slowly hardening, and will inevitably fuel discussion of pending policy mistakes and renewed “double dip” risk”. It notes that interest rates are still at emergency levels and inflation is a growing risk. If governments are indeed forced to raise interest rates (Compass predicts this will happen in Q2), there will be a negative impact on mortgage and business borrowing costs, corporate confidence and relative returns on investment portfolios. The risk is that with a rise in interest rates, comes a rise in uncertainty and a fall in risk appetite.

Resilient global recovery

Despite the doom and gloom, Compass reassures investors that the global recovery still has considerable momentum. In particular, the US is less fragile than it was last year. Compass sticks by its previous line – investors should focus on developed equities, as that “is where prospects are brightest relative to expectations”. Although emerging markets are forecast to grow at a faster pace, they also face more pressing inflation and interest rate concerns.

 

 

Investors looking for exposure to international developed equities could consider International Trader. Our platform allows clients to trade in stocks listed on major US, Canadian and European exchanges. 

You should ensure that you research the regions you are interested in and fully understand the nature of the stocks in which you invest. Also bear in mind that investing internationally brings with it currency risk. Fluctuations in currency values could have a negative impact on the value of your investments.

For those with an interest in investing in Japan, or in commodities such as oil, you could consider using Exchange Traded Funds (ETFs) or Exchange Traded Commodities (ETCs).  ETFs such as the iShares MSCI Japan (IJPN), an ETF designed to track the MSCI Japan index, or ETCs such as ETFS Crude Oil (CRUD), designed to track the DJ-UBS Crude Oil Sub-IndexSM could be worth considering. 

You should be aware that the price of oil can be volatile and you may incur losses if you invest in oil-related products.  The value of investments in ETCs such as ETFS Crude Oil can go down as well as up and you may get back less than you invest.

You should ensure that you read and understand the full simplified prospectus for products such as ETFs and ETCs before investing.

 

17 March 2011 - The Japanese earthquake and its global impact

 

As events in Japan continue to evolve, the world waits for the full extent of the human, physical and financial destruction to become clear. Last week’s earthquake was the largest in over 100 years, measuring 9.0 on the Richter scale and triggering a tsunami which ravaged large areas of the north-east coastline – an area that accounts for 6 to 7% of Japan’s GDP. The markets reacted swiftly; investors sold off Japanese equities in response to fear of the unknown and the Nikkei 225 Index fell by 15% in a six day period. The Bank of Japan responded aggressively, injecting large amounts of money into the economy - to boost liquidity and to protect a fragile economy from collapse. At the time of writing, this amount is more than half a trillion dollars.

Behavioural finance research into investment psychology indicates that markets often react sharply to natural disasters and that these reactions can be too fast and easily reversible, which could mean bad news for an investment portfolio. An initial investment response to Japanese events from Barclays Wealth encouraged clients to avoid “selling at the bottom of what turns out to be a short-lived setback, or perhaps buying at the top of a short-lived spike¹.  Indeed, Barclays Wealth’s view on Japanese equities is that they remain attractive and should continue to comprise up to 15% of a developed equities investment portfolio over the medium term.

There is sound reasoning behind this view. It is important to remember that Japan is a resilient nation, has experienced similar events in the past and has demonstrated an amazing ability to recover from them. Cast your mind back to the January 1995 Kobe earthquake, which caused devastating human cost, pushed the Nikkei 225 Index and Japanese equities to plummet and consequently triggered a surge in the Yen. However, as Barclays Wealth observes, these market and currency movements were reversed within the same year.

One Financial Times journalist, living in Tokyo, observed recently that in the current instance, “notwithstanding the cost in lives and disruption, the economic impact on a country as wealthy as Japan is likely to be minimal"². However, this time, things are markedly different. Japan is suffering a three-pronged attack; earthquake, tsunami and nuclear threat. The explosions at the Fukushima nuclear power plant have threatened to elevate Japan’s problems to a new level, one which did not exist in 1995. The potential for more lasting impact is as yet unclear.

There is already discussion around the long-term viability of nuclear energy - is the risk of something going wrong too great? What does this mean for renewable energy sources? Oil and gas? Coal? One thing is for certain; if Japan is able to control and contain the nuclear threat they face, that will be good news for the Japanese economy, Japanese equities and the global stock markets.

The comment issued earlier this week by Barclays Wealth encouraged investors to remain overweight in developed equities as part of a balanced long-term investment portfolio. The message is: do not panic and keep faith that Japan will recover from this natural disaster. Japan is a grown-up nation, we are in grown-up markets and it is important not to react too harshly. One closing comment from the Financial Times: “the greatest cause for optimism about Japan is the reservoir of social capital that has sustained it through two tough decades"³.

Once the dust has settled and the full extent of the impact is visible, Japan will rebuild. Such is the anticipated determination of the Japanese people to recover from the disaster; the question on the rebuilding programme will not be “how is it funded”, rather “by how much will it be funded”.  The standard constraints on Japanese public funding typically do not apply in an emergency and there is already confidence that fiscal support will ensure that rebuilding progresses.

Individuals interested in investment exposure to Japanese equities specifically, may want to consider Exchange Traded Funds (ETFs), such as the iShares MSCI Japan or managed funds, such as Neptune’s Japan Opportunities or Invesco Perpetual’s Japan fund.

The value of investments in ETFs and managed funds can go down as well as up and you may receive back less than you originally invested.

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¹Initial Investment Response to the Events in Japan, Barclays Wealth, March 2011

²Japan is rich in resilience”, Financial Times, 11 March 2011

³Japan is rich in resilience”, Financial Times, 11 March 2011

 

 

18 August - Sayonara Japan………..ni hao China?

In addition to striking fear into the hearts of the organisers of the London 2012 Olympics, the invention of silk and having a really, really long wall, China has a new accolade to add to its name.

This week, Japanese officials admitted defeat and handed the second-largest-economy-in-the-world crown to China.

Following an unexpectedly poor economic performance and the absence of any decent growth in the first or second quarter of 2010, Japan has slipped to third place in the economic world rankings.

• China’s Q2 GDP - $1.337 trillion
• Japan’s Q2 GDP - $1.288 trillion
• Chinese economy grew by 11.9% and 10.3% in Q1 and Q2
  
  

The news gets worse for Japan. Far from being a blip, economists predict that China will go on to secure this position over the next half of the year.

Although some experts feel this week’s events are more important from a symbolical standpoint than an economic one (for one, the International Monetary Fund marks 2001 as the time when China overtook Japan), the news is certainly interesting for investors considering China.

Proof is in the pudding

While this is interesting news, the landmark event will not necessarily come as a huge surprise to Barclays Stockbrokers clients, who have been voting with their feet (or rather their wallets) on this topic for some time.

The appetite for investment in China has been boosted over recent years by general economic sentiment and as a result, the nation is typically seen as the front runner of the emerging markets. Conversely, investment feeling on Japan has been more conservative. ‘The lost decade’ of the 1990s, where Japanese economic growth lagged the other global developed economies, still casts a shadow over investor optimism.

In the world of funds, the regional frontrunners for Barclays Stockbrokers clients are Gartmore China Opportunities and Invesco Perpetual Japan, and the figures speak for themselves. Gartmore’s China offering has three times as many clients invested and five and a half times the amount of money.

The difference is not quite as pronounced when it comes to Exchange Traded Funds that track the two markets, but the preference of Barclays Stockbrokers clients is still plain to see. The iShares FTSE/Xinhua 25 (FXC), hailing from China, attracts 36% more investors than the iShares MSCI Japan (IJPN), and has 63% more assets invested.

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1 Telegraph.co.uk, 17 August 2010

 

20 July 2010 - Global Reach – Consider Korea?

 

We are now well into the summer months of 2010, a time when many investors reflect on their portfolios. Is your investment strategy working or is it time to make some changes? It could be the perfect opportunity to shape up your investments for the second half of the year.

When you are reviewing your portfolio, you might want to consider one of the key investment themes highlighted in recent times - the need for global diversification.  It has also never been as easier.

Over the coming weeks we will be examining how you can achieve global reach in your portfolio. Our first spotlight falls on an Asian market that is often overlooked – Korea.  In many respects, Korea has historically been overshadowed by its more familiar neighbours, China and Japan. The two Asian heavyweights tend to hog the limelight, but from an investment perspective, Korea is worth considering.

Compass points to Korea

The July edition of Compass (Barclays Wealth’s investment strategy report) has a focus on Korean equities and highlights several reasons to invest in Korea. These include:

                  

• Valuations – Korean equities currently appear to be undervalued

• Economic prospects – low unemployment levels and strong growth data      

• Export strength –  a key part of the Korean economy likely to benefit from continued global recovery and increasing consumption by wider Asian markets

There is also the prospect of Korea possibly being upgraded from an emerging market to a developed market, a re-classification currently being considered by MSCI, one of the leading providers of global market indices. This reclassification would improve Korea’s prospects as an investment destination further still. To find out more, login to your account to view the latest edition of Compass.

Investment Options

If you like the idea of investing in an emerging market, such as Korea, and creating a globally diversified portfolio, there are a number of ways you can achieve this. Perhaps the simplest way is to invest in an Exchange Traded Fund (ETF) focused on the Korean market.  Consider the iShares MSCI Korea – an ETF that aims to track the MSCI Korea index and provides diversified exposure to around 100 Korean equities. Bear in mind that the value of ETFs can fall as well as rise and you may get back less than you invested.

Alternatively, you could consider investing in a managed fund focused on the wider Pacific region. Funds from the “Asia-Pacific excluding Japan” sector will provide investment exposure to the Korean market. For example, Fidelity South East Asia is a managed fund that aims to provide capital growth by investing in equities throughout the Asian region, excluding Japan and has a 21.8% exposure to the Korean market. Although remember that the performance of funds is not guaranteed and you may get back less than you invested.

Global reach for your portfolio is now close at hand. If you think an investment in Korea is appealing and will add to your portfolio’s international diversification, reach out and grab it!

Barclays Stockbrokers does not give advice. If you are in any doubt as to the suitability for you of investing in emerging markets such as Korea, or in ETFs or managed funds, please seek financial advice.

 

4 September 2009 - Renewed hope for Japan?

A landslide victory for the Democratic Party of Japan (DPJ) over the long-ruling conservative Liberal Democrats (LDP) has signaled the historic end of what had come to be known as the ‘1955’ system, raising hopes of reform for the world’s second-largest economy.

Initial market reaction following the election was positive. The Nikkei hit a near 11-month high before easing back following poor performance of the Shanghai Composite Index – see our Investment ViewPoint: Comment ‘No immunity from uncertainty’, while the Japanese yen rose to a seven-week high against the US dollar.

 

The DPJ now faces a number of challenges to sustain this positivity in the coming months, the most prominent being the economic crisis. The Japanese economy has struggled to emerge from recession, with unemployment at 5.7%, it’s highest ever rate, and debts equal to 172% of GDP in 2008, according to the Organisation for Economic Co-operation and Development.

Yukio Hatoyama, the leader of the DPJ has pledged to boost welfare and reform bureaucracy, shifting government support from corporations to helping consumers and workers. However some economic analysts are wary that the party may over-spend in light of the country’s debt problems.

 

Nonetheless, this appears to be Japan’s chance to break away from the economic stagnation of recent years – and whilst the DPJ victory appears to have been well priced-in to the market, the removal of any political uncertainty is often good for financial markets.

If you are looking for investment exposure to Japan you could consider the iShares MSCI Japan which tracks the MSCI Japan Index and offers exposure to over 300 large and mid cap Japanese companies, if unsure as to this investment seek independent advice.

To follow the Japanese story further, access the latest news and market movements by logging in to your account and visiting our Research Centre.

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