Hong Kong, 9 August 2011 – The US debt rating downgrade was not a total surprise but came at a time when investor confidence was already low and risk aversion high. In the short term, Asia’s equity markets will suffer a sell-off until policymakers respond more seriously to calm markets, said Mr. John Ford, Asia Pacific Chief Investment Officer for Fidelity International.
“The downgrade hopefully will prompt policymakers, both in the US and Europe, to implement more serious policy responses, and the market is looking for this. But despite speculation about a downgrade, US Treasuries have recently outperformed, highlighting that investors still view US bonds as a safe haven asset class, primarily due to ample liquidity. Over the short term, and with risk aversion remaining high and governments around the world voicing their continual support, US Treasuries are likely to remain supported.”
Weaker US dollar consequences
With expectations of a further weakening of the US dollar, authorities across the region need to be mindful of the policies they put in place regarding currencies, Mr. Ford said. “Asian economies and governments are placing more emphasis on domestic spending and consumption being the key driver of GDP growth. At Fidelity a number of our investment professionals for some time have been finding more attractive investment opportunities that relate to the domestic growth story versus exports.” “Having said that, we can't ignore that exports and demand from customers in the developed markets still play a role in overall growth projections.”
“The downgrade has also once again sparked debate about how long the US dollar will be the global reserve currency and the need for the internationalization of the RMB. This could result in an acceleration of RMB flows.”
Strong yen undermines Japanese earnings
Mr. Ford acknowledges that this turmoil has accelerated a disconnect between corporate fundamentals and equity market performance in Japan. “While Japanese companies continue to announce healthy quarterly results, with positive surprises outnumbering negatives in their full-year earnings projections, the yen's strength is undermining investors' confidence. “
“This is a valid concern for Japanese exporters, whose forex assumptions for this fiscal year earnings projections are about ¥80/$ on average. Although government intervention has had an effect, if the yen's strength against the dollar persists around the pre-intervention levels of ¥76/$, Japanese exporters might have to revise down their operating profit projections to negative growth. However, this worst-case scenario appears to have already been discounted in the current market valuations. “
China still relatively strong
Mr. Ford said that due to a tighter policy stance and signs that inflationary pressures may now be under control, China is in a better position relative to its global peers. “If the global economic environment remains weak, Chinese authorities could move towards more supportive or accommodative policies to maintain healthy domestic consumption and continue to meet economic growth at much attractive levels compared to the developed world.”
Living in a two-speed world
Mr. Ford said the downgrade highlights that we are living in a polarized world - growth from Asia and other emerging economies are expected to outpace growth in developed economies. “The downgrade and consequences may prove to be a boost to emerging Asian market equities, given the attractive valuations and relatively strong fundamentals.”
Mr. Ford added that Fidelity's investment professionals who predominantly use stock selection to construct their portfolios are using the market's volatility as a suitable buying opportunity for companies that have attractive growth prospects and that are trading at very reasonable prices.
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About Fidelity International
Fidelity International provides investment products and services to individuals and institutions in the UK, continental Europe, the Middle East and Asia Pacific. Established in 1969, the company has over 5,400 staff in 23 countries and manages or administers client assets US$312.2 billion as at 30 June 2011. Fidelity has over 7 million customer holdings and manages nearly 750 equity, fixed income, property and asset allocation funds. Fidelity’s fund managers receive research from one of the largest proprietary research teams, covering 99% of the world’s largest listed companies. Fidelity International is an independent company which is privately owned.
Tel: 852 2629 2800
Tel: 852 2629 2800