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Investment Outlook 2001

Investment Outlook 2001. Daniel Chan Managing Director & Chief Investment Officer UOB Asset Management Ltd. Investment Outlook 2001. Contents - What Happened in 2000 - The Issues in 2001 - Base Case Investment Scenario - Outlook & Strategy - Global Bonds - US Equities

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Investment Outlook 2001

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  1. Investment Outlook 2001 Daniel Chan Managing Director & Chief Investment Officer UOB Asset Management Ltd.

  2. Investment Outlook 2001 Contents - What Happened in 2000 - The Issues in 2001 - Base Case Investment Scenario - Outlook & Strategy - Global Bonds - US Equities - European Equities - Japan Equities - Asia ex-Japan - Singapore - Conclusions

  3. What Happened in 2000 1. Correction in the technology / telecom sector. 2. Tightening of US monetary policy. 3. Slowdown in US economy. 4. Sharp revision of corporate earnings. 5. The Euro “tanked”. 6. Spike in oil prices. 7. Asia equities did especially poorly.

  4. NASDAQ Ruled... Optical coys revise up earnings guidance after strong Q4 00 results Tech stocks correct on fears that telcos cut back in CAPEX will hurt tel eqpt food chain Intel pre-announces lower than expected results for Sep quarter German UMTS licence auction ends - investors fear telcos overpaid Liquidity in high yield financing evaporates causing bankruptcies amongst US emerging telcos US mutual funds tax loss selling pressure takes effect Semiconductor and telecom eqpt coys report robust bookings Apple reduced Q1 01 earnings guidance Nokia lowers Q3 margin expectations - investors fear slowdown in cellular handset demand Baron's publishes article on excessive vendor financing - fears of CLEC default on loan repayment resurface SSB’s Jonathan Joseph calls an earlier end to semiconductor growth cycle UK UMTS licence auction ends - investors fear telcos overpaid Nortel reports inventory build up at US telcos Cisco reports build up in inventory Apple reduced Q1 01 earnings guidance Source: UOBAM

  5. Fed Rate Hikes 16 May - 50 bp hike 21 Mar - 25 bp hike 2 Feb 25 bp hike 2000 1999 Source: Bloomberg

  6. Fed Rate Hikes + Earnings Growth

  7. Fed Rate Hikes + Earnings Growth Source: Soc-Gen

  8. Oil Price Rose Source: Bloomberg

  9. Asia Equities Did Poorly Investments were flowing out of Asia dedicated funds. Portfolio equity flows into Asia Source: Goldman Sachs

  10. What Happened in 2000 How the stock markets performed last year %

  11. MSCI Far East Free Ex-Japan Source: Bloomberg

  12. Investment Opportunities in 2001 Down markets create opportunities... Source: MSDW

  13. The Issues in 2001 - Will there be a hard landing ? - Have the TMT sectors bottomed ?

  14. The Issues in 2001 Will there be a hard landing ? • The case for : • Negative wealth effect • Investment boom (especially IT) over • Consumer is tapped out • Corporate debt build-up

  15. The Issues in 2001 Will there be a hard landing ? • The case against : • Room for interest rate cuts • IT and other technological investment still needed in a fiercely competitive environment • Other policy options available (tax cuts, fiscal stimulus, US dollar weakens) • US economy remains highly competitive

  16. The Issues in 2001 For a HARD LANDING scenario to happen, these must happen: - Core inflation rises rapidly, preventing a relaxation of monetary policy, - Wage rise (labor costs) outstripping productivity growth, - Oil prices skyrocketing out of control, - Extreme risk aversion spreading to investment grade credits, - Occurrence of an unexpected and contagious event risk that results in confidence flight. Our conclusion is that the odds of this happening is smaller than that of a SOFT LANDING.

  17. The Issues in 2001 The Fed and the other central banks have room to cut interest rates...

  18. The Issues in 2001 Have the TMT sectors bottomed ?

  19. Have the TMT Sectors Bottomed ? Nasdaq Price Chart (1975 – 2000, logarithmic scale) Between 1980 and 1990 : Index up +84.8% Between 1990 and 2000 : Index up +560.8% PE of NASDAQ Composite : 101.8x

  20. Have the TMT Sectors Bottomed ? Nasdaq Price Chart (1975 – 2000) Between 1980 and 1990 : Index up +84.8% Between 1990 and 2000 : Index up +560.8% PE of NASDAQ Composite : 101.8x

  21. Have the TMT Sectors Bottomed ? • US technology sector is attractive relative to the broad market US Tech sector PEG (Fwd EPS) against US broad market US Tech PEG 1.22x vs S&P 500 PEG 1.50x Source: MSDW (Jan 01)

  22. Have the TMT Sectors Bottomed ? The NASDAQ 100 - Now closer to fair value Source : Datastream

  23. Have the TMT Sectors Bottomed ? The tech bubble in perspective.. Source : The BCA

  24. Have the TMT Sectors Bottomed ? Valuation Statistics for Top 20 companies of NASDAQ 100

  25. Have the TMT Sectors Bottomed ? Valuation Statistics for Top 20 companies of NASDAQ 100

  26. TMT Valuations - US US 2001 Price/ Expected EPS Implied EPS Companies PER Book growth (00-05) growth (00-05) Worldcom 15.8 1.0 13.4% 7.5% Nortel 33.7 4.4 25.9% 20.5% Corning 35.2 5.6 27.4% 22.2% JDS Uniphase 37.1 1.7 47.4% 24.5% Sun Microsystems 32.1 10.9 23.0% 16.0% EMC 62.7 18.8 30.1% 26.0% Microsoft 24.1 5.8 19.7% 23.0% AOL Time Warner 73.0 11.0 25.0% 21.0% Intel 21.1 5.7 19.5% 8.0% PMC Sierra 42.0 14.6 44.0% 17.0% Broadcom 61.0 8.9 46.0% 32.0% Applied Materials 13.0 5.6 24.0% 1.0% Broadvision 40.2 2.6 50.9% 24.0% Yahoo 49.7 8.3 44.2% 28.2% Prices as of 5 Jan 01

  27. TMT Valuations - Europe Europe 2001 Price/ Expected EPS Implied EPS Companies PER Book growth (00-05) growth (00-05) Nokia 43.7 29.3 25.0% 22.5% Alcatel 31.8 5.2 31.4% 15.2% Autonomy 79.0 28.0 50.0% 35.3% Vodafone 44.4 1.1 30.0% 24.8% Deutsche Telekom 43.1 3.0 10.0% 16.7% France Telecom 37.9 5.0 16.5% 8.1% Prices as of 5 Jan 01

  28. TMT Valuations - Japan Japan 2001 Price/ Expected EPS Implied EPS Companies PER Book growth (00-05) growth (00-05) Murata 24.5 5.9 23.0% 12.0% Tokyo Electron 19.3 4.7 18.3% 10.0% NTT DoCoMo 47.5 10.8 18.0% 9.0% Fujitsu 164.5 2.7 18.0% 19.0% Trend Micro 87.3 29.1 26.0% 19.0% Sony 52.4 3.6 16.0% 12.5% Net One Systems 75.2 19.6 23.0% 15.5% Nippon System Development 59.9 9.7 26.0% 21.5% Prices as of 5 Jan 01

  29. TMT Valuations - Asia ex-Japan Asia 2001 Price/ Expected EPS Implied EPS Companies PER Book growth (00-05) growth (00-05) China Mobile 27.0 10.4 26.0% 18.0% PCCW 25.0 3.9 11.0% 22.0% Korea Telecom 20.0 1.6 14.0% 11.0% SK Telecom 21.0 6.4 25.0% 15.0% Taiwan Cellular Corp 9.0 5.8 17.0% -6.0% Infosys 42.0 50.7 52.0% 50.0% Gul Technologies 10.0 2.2 22.0% -10.0% Venture Manufacturing 22.0 7.4 22.0% 11.0% TSMC 13.0 7.4 23.0% 5.0% HK TVB 22.6 7.8 18.9% 15.5% Prices as of 5 Jan 01

  30. Base Case Investment Scenario • 1. A soft landing for the global economy - with the slowdown led by the US. • 2. Inflation to remain subdued. • 3. Interest rates to fall in 2001. • 4. Oil prices to stabilize at current levels.

  31. Bond Market Outlook Expect lower rates ...

  32. Bond Market Outlook Credit spreads are attractive...

  33. Bond Market Outlook What the Fed Funds Futures are forecasting? • US Fed Funds futures are already forecasting almost 1% cut in Fed Funds rate by end Aug 2001

  34. Bond Market Outlook Rates anticipation • Bond yields have already priced in a soft landing • Unless there is a hard landing, further yield decline would be a overreaction • Therefore yields are likely to stay close to current levels unless the economic scenario worsens • However, reality tells us there will always be overreaction

  35. Bond Market Outlook EMBI+ Spread IndexThe emerging sovereign spread has widened despite improving fundamentals …….

  36. Bond Market Outlook US Real Yields - Little room to fall Source: Bloomberg

  37. Bond Market Strategy • Bond yields do not have much room to fall • Slightly below benchmark duration • Opportunities in good quality investment credits • Emerging sovereign credits to outperform high yield corporate bonds

  38. Equity Market Strategy 1. At current levels, equities have adequately discounted the risks, and are well underpinned by more reasonable valuations. 2. Stay invested and stay diversified - equities are attractive in a soft landing scenario. 3. Equity market strategy: US Underweight Europe Neutral Japan Neutral Asia ex-Japan Overweight

  39. Equity Market Strategy 4. Sector Strategy - Financials and interest rate sensitive sectors should benefit from lower rates. - Healthcare - the consistent growers, resilient to earnings disappointment. - Technology & Telecom - selective in telecom and tech fallen angels.

  40. US Equities - Underweight Economic growth is slowing to a more moderate pace - we are looking for a soft landing for the US economy US companies’ profit growth will also slow

  41. US Equities - Underweight Fourth quarter companies’ earnings will be weak, partly hurt by weaker consumer spending And expectations of lower capital spending

  42. US Equities - Underweight PER and PEG of US Stocks (S&P 500)

  43. US Equities - Underweight Source : SocGen

  44. US Equities - Underweight Source : SocGen

  45. US Equities - Underweight Mutual fund cash levels have risen back to its mean.

  46. US Equities - Underweight No excess capacity outside technology Source : The BCA

  47. European Equities - Neutral • Warning signs of a slowdown in the economy

  48. European Equities - Neutral • But there is also more leeway for expansionary fiscal policy

  49. Euro Heading Higher Trend Reversal European Equities - Neutral • More room for looser monetary policy, and

  50. MSCI Europe European Equities - Neutral Stock valuations are not demanding

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