JF Funds, an arm of JPMorgan Fleming Asset Management, advises clients to move out of bonds and cash and into equities to capture expected gains over the course of 2002. Many Hong Kong fund managers have been urging investors to "catch the upside" but to do so via hedged guaranteed products. JF Funds is having none of that; just be bullish is its message to the retail market.
For many institutions, the buy opportunity was September. Since then markets, from New York to Hong Kong, have rebounded sharply. Indeed most question now whether it is time to take profit. The retail segment, however, particularly in Asia, has been slow to follow; JF Funds argues if it is to return to the equities market, now is the time.
David Atkinson, senior portfolio manager and head of the JF Global Equity Fund, says the September 11 terrorist attacks on the United States merely exacerbated an already declining global economy - and speeded up massive efforts by governments to boost liquidity.
The American consumer is central to recovery. It had been weakening before September 11 and will continue to do so. Worse, American corporate earnings hit 20-year lows by the middle of 2001 and the numbers for the second half are likely to be even more severe. Profits in the second half of the 1990s were not sustainable, while PE ratios were at ridiculous highs. The threat of more terrorist atrocities adds a further worry to the outlook.
But Atkinson believes active equity portfolios such as his will outperform other asset classes next year. Governments are responding by slashing interest rates, cutting taxes and boosting spending. The sheer weight of this strategy will overpower the bad news, he says.
Fed funds have reduced interest rates to 2%, and the US is experiencing negative real interest rates. Money supply throughout OECD economies, led by the US and Japan, is at an all-time high - higher than in the millennial uncertainty embodied by the Y2K scare. The valuations of equities versus bonds in the developed markets has steadily risen.
This liquidity is already making itself visible. For example, Atkinson says Americans are purchasing mortgage loans and refinancing loans at rising levels. Furthermore, while corporate debt in the US remains too high, it is at last coming down.
The main worry: unemployment. American unemployment figures are likely to go up another 1%-2% over the next several months. This and other negative factors mean the short term is dangerous for equity investors. But Atkinson is convinced the longer term is an obvious call to buy equities. Given volatility in the markets, he can't say if these gains will be realized in a matter of weeks or months, but believes by the end of 2002 the equity investor who buys today will have made the right choice.
