Cautious on global equities; time to take profits: Expert

With a modest underweight stance on equities, Nicholas Ferres of Eastspring Investments remains cautious on the global markets in the short-term. However, he would not be surprised if it runs a little bit higher.

“A fair bit is in the price already so it does make me a little bit cautious that the S&P is trading near a multi-year high. I wouldn’t be surprised to see the S&P 500 up at 1,500, for example. But for more tactical investors, it is probably an opportunity to take some profits there. Most markets globally are now overbought. I think the sentiment is turned a little bit more bullish than what it was months ago. While the US fiscal risks have clearly been well flagged to invest, there has been a lot of discussion about it. It is still quite plausible that that is a trigger towards the end of year post the US election,” said Ferres. Talking about the slew of reforms that the Indian government has recently announced, Ferres said that it is a step in the right direction because India does need to address its declining investment and its under-investment and that is important for the equity market and for corporate profits. Below is the edited transcript of the interview Q: Do you see an extension of the global risk-on rally post QE3 or do you think most of it has happened already? A: I think a fair bit is in the price already. We are a bit cautious in the short-term and we have reduced a little bit of risk this week. But it is plausible that markets run a little bit higher. I guess the key point, ofcourse, is that markets ran up quite a lot in anticipation of further quantitative easing by the Federal Reserve in the US. Also, sentiment out of Europe was helped by the actions by the ECB, and to some extent, some anticipation of further policy easing via infrastructure spending in China albeit the Shanghai Composite hasn’t responded there in that case. Q: Would you be taking profits then right now or do you think it is prudent to still stay tactically bullish for the moment? A: We have taken a little bit of profit so we have reduced the risk. We have got a modest underweight to equities at the moment. But as I said, I would not be surprised if it runs a little bit higher. We added long position towards the end of August in the global mining sector. We did that via Asia’s global mining ETF listed in the US, which is a basket of largecap global miners. That was very much on the basis that that index and that sector was extremely cheap trading at about one times book value. We also felt that sentiment towards the mining sector and global commodity prices was relatively soft at the time. In addition to that, we felt that the odds of further quantitative easing by the US were fairly high. But now, a fair bit of that is in the price. Q: How do you see global investors positioned right now in emerging markets of Asia? Do you think that underweight position a few months back has corrected and people have invested quite a bit and maybe even move to an overweight kind of stance? A: One of the best global surveys, which is the global fund manager survey by Merrill Lynch, is a fairly good summary of how global fund managers and global investors are positioned. It suggests that investors are completely flipped and are now overweight European equities where they were extremely underweight. I did not see the details but I suspect that there have also flipped to overweight emerging markets as well. We are a little bit cautious on that to some extent. But as I said, to some extent, our position in the global mining sector is a proxy on EM because it is leveraged to global commodity prices particularly industrial mills. Q: Do you see any event on the horizon, which can trigger off a correction to global equities in the near-term? A: The first point is that a fair bit is in the price already so it does make me a little bit cautious that the S&P is trading near a multi-year high. As I said, it is quite plausible that it stands. I wouldn’t be surprised to see the S&P 500 up at 1,500, for example. But for more tactical investors, it is probably an opportunity to take some profits there. The second issue is that most markets globally are now overbought. I think the sentiment is turned a little bit more bullish than what it was months ago. While the US fiscal risks have clearly been well flagged to invest, there has been a lot of discussion about it. It is still quite plausible that that is a trigger towards the end of year post the US election. Q: How would you approach India now where we have seen a sharp rally partly on global liquidity and partly on a new move from the government over the last few days? A: We were bullish on India about three months ago. We had an overweight position back around middle of the year around early June. We took that position off on August 31 when we switched into global mining sector, and to some extent, that was because valuations head priced in a lot of the improvement. We were clearly a bit early because India has done very well in September. But the recent move is up in commodity prices, particularly oil prices, make us little bit more concerned. Various factors certainly don’t help Indian fundamentals. Secondly, valuations are no longer extremely cheap. I think sentiment turned around towards the Indian market from being very pessimistic to a little bit more euphoric compared to where it was. In terms of the measures announced recently, this is certainly a step in the right direction and they are addressing some of the India’s core fundamental problems i.e. the fiscal and external deficit. But my understanding is that the increase in the diesel tax hike, for example, will reduce the fiscal deficit over the next twelve months by 0.2 percent of GDP. If you put that in the context of 9 percent consolidated fiscal deficit, it is not very helpful at all. I think investors will be disappointed. Clearly, there is a risk that the opposition party has caused some backsliding there and all those measures do not get implemented. But at least on the surface, it is a step in the right direction because India does need to address its declining investment and its under-investment. That is important for the equity market and for corporate profits.