Europe’s investment loss will be Asia’s gain

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But not all Asian markets should be treated equally according to GaveKal and Certitude

Craig Mowll

Craig Mowll

The loss of momentum in Europe and the absence of any new potential driver to push European equity markets to new highs will see retail investors increasingly turn to Asia over the next 12 months according to Louis Vincent Gave, COO and Chief Risk officer of GaveKal Capital, on the eve of his Australian visit.

With little to keep retail investors and the marginal investment dollar in Europe, Asia looks well positioned to capitalise on Europe’s loss, particularly with the MSCI Asia index now outperforming the MSCI World for the first time since the first quarter of 2010. Adding to this woe Eurozone equities are now underperforming cash, gold, local bonds, international bonds and international equities.

Mr Gave commented, “Unfortunately for Europe, the marginal investment dollar is more often than not highly momentum-driven and chases performance. That’s because it is usually provided by the retail investor, and retail investors have a long track record of being momentum jockeys.”

This also mirrors the attitudes of investors in Australia according to GaveKal’s Australian partner, Certitude Global Investments. CEO Craig Mowll commented, “Our monthly investment Index, the CGIII, surveys the attitudes of Australian investors and our last report echoes this sentiment. In fact Asia was one of the few regions to stand its ground when investors were asked which international markets they were most keen to invest in over the next 12 months. Most other major markets saw a decline in investor appetite.”

But both GaveKal and Certitude have cautioned investors that not all boats will rise with the tide and country divergence is ever more important. There are widespread differences between the emerging markets within Asia, they agreed.

Mr Gave expanded, “Between 2003 and 2010 there was a high correlation between Asian equity markets driven by the emergence of China as an economic powerhouse, the quintupling of energy prices and the GFC and recovery, but since then the correlation has loosened tremendously. China, Hong Kong and South Korea have been underperformers as growth in China has decelerated. Meanwhile political developments in India, the Philippines and Indonesia have been drivers of the markets.”

The recent CGIII lends further support to this. Mr Mowll added, “We saw in the August CGIII that within Asia the attitudes to each country vary enormously. We saw appetite for Asia increased on the whole, however on an individual basis, interest in China was down slightly while India and Japan were on the increase. The balance of payment surplus and good inflation levels in the Philippines will also make this a stand out for investors.

“Asia is not a homogenous group and investors will increasingly look for managers that act on this and factor this into their portfolio construction.”

One of the key themes of Mr Gave’s Australian visit will be stock selection and he is expected to suggest that the days of casting a wide net are also over, with individual stock selection more important in light of the tremendous divergence within markets. Mr Gave explained, “There is a focus now to concentrate the portfolio on strong conviction ideas to add more value. If we look at Chinese internet stocks versus SOEs or Japanese banks versus exporters these are clear cases in point.

Mr Mowll concluded by saying that investors are increasingly seeking the expertise to give them the confidence to invest in Asia.

He concluded, “Australian investors are informed enough to know that Asia is not one homogenous emerging market but they may not have the time to understand the impact of demographic profiles, political and economic developments on the performance of individual markets. This is why they turn to an investment manager that is nimble enough change the portfolio quickly as the region evolves.”

Louis Vincent Gave will be visiting Australia as a guest of Certitude next week.

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