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Insights From Macquarie’s Experts On The Asian Markets
In the Spotlight | 27 April 2012
By: Xavier Lim
Articles (51) Profile
By: Ong Qiuying
Articles (131) Profile

Worries over the health of the two world’s largest economies, the United States and China, as well as the on-going Europe crisis, continue to weigh on markets as investors sought to seek bright spots elsewhere in emerging countries. How will the markets fare and how can we take advantage of the current situations?

Shares Investment had the privilege to speak to Macquarie Group’s Chief Asian Strategist, Emil Wolter and Macquarie’s Head of Macquarie Warrants, Singapore, Barnaby Matthews, in an exclusive interview to discuss the outlook of the Asian markets as well as how we can capitalise on warrants trading to answer these lingering questions.

Shares Investment: What are your thoughts on the outlook of Asian markets and your take on the current trading environment?
Emil Wolter: The medium-term outlook for the world economy and stock markets remains a going concern, but I am cautiously optimistic more tactically for the remainder of this year, premised on four major factors:

• Global loose liquidity conditions to remain with central banks’ proven commitment to maintain it
• The short-term business cycle bottomed out in late 2011 and remains on an improving trajectory, which is likely to last between five to nine months longer despite being a fragile recovery
• The significant amount of political events globally, particularly the US, can be seen as a marginal positive as those looking for re-election are also not looking to engineer large financial market declines
• Valuations are fair to moderately cheap for equities which leaves the asset class looking significantly better than the alternatives

The important point to underscore is that both economic growth and financial markets returns are likely to be lower going forward and distributed with higher volatility due to the increased influence of policy. So, investors need to calibrate their expectations and investment styles accordingly.

SI: With Premier Wen Jiabao lowering China’s growth target to 7.5 percent and China’s first quarter GDP cooling to 8.1 percent, the slowest in 11 quarters, and more recently, China widening the trading band of its currency by 1 percent against the dollar, what is your view on the outlook of the China market?
Emil: The outlook for China can be divided into at least two separate time frames with the immediate next 12 months remaining pretty good in my view while the longer-term one (three to five years) is more challenging given the on-going economic transition and rebalancing in China and the pressure this puts on existing institutions, level of growth and credit quality.

For the here and now, valuations are more than reflecting the longer-term concerns while the short-term business cycle in China is improving as illustrated through stabilising monetary, manufacturing, foreign exchange and inflationary numbers.

The trouble with the current cheap valuations is that while there is room for near-term multiple expansion, most of the large companies are not well positioned to help China undertake its economic rebalancing towards new areas of wealth and job creation and towards higher value-added, by virtue of being state owned enterprises. These companies have done well in a fully controlled, command economy but will likely find the going tough in a more liberalised setting.
As such, the real mid-term winners will more likely be medium sized private companies but those are not heavy in the index and may not help “move the needle” at the index level. It is a complex situation but one where short-term profits are likely across the board and where over time profits will still be available but on a more much selective basis as GDP growth moderates and the engines of activity changes.

SI: Do you foresee a soft or hard landing in China?
Emil: I don’t expect a hard landing in China on account on several things, the most important of which is that they retain the financial and political ability to gradually implement reforms to the economy. I suppose that should they fail to do so (and there are no signs of this at the moment although the pace is always subject of debate), then maybe the risks of a hard landing will rise.

Commentators and spectators have discussed this issue pretty much during the 15 years I have been looking at the market, and so far, the track record for the end of world (in Chinese economic terms) isn’t great. That’s not to say you can’t have cyclical slowdowns and asset quality cycles or even a banking crisis. Still, the ability of the economy and politics to adjust is probably serially underestimated.

SI: With the West battling issues on sovereign debts and a weaker economy outlook, the performance of stocks in emerging markets has been the talk of the town of late. Do you think this is an opportune time to capitalise on emerging markets?
Emil: Actually, I don’t. I think the most important thing to remember for investors is that global rebalancing is negative for emerging markets and positive for developed markets because emerging markets has to turn less competitive and more indebted and developed markets the exact opposite.

Despite all the hype around emerging markets from an asset allocation and growth perspective, they haven’t been outperforming for close to two years. This is food for thought as it illustrates that consensus is often late in identifying changing trends. So while there are going to be good individual stories in emerging markets, I think they are not particularly attractively valued relative to developed markets, they have weaker earnings momentum (since costs are rising faster), ownership is much more onerous (i.e. everyone is already overweight) and the macro risks have begun to rise.

SI: Are there any industries or sectors you are bullish or bearish on?
Emil: I like the telecommunications sector as it is the most attractive way to play discretionary consumption; they might not grow as fast as projected for other discretionary consumer industries but they are trading at much lower valuations, seeing growth return despite analyst scepticism with consumers paying up for data and the dividends are high and sustainable, which are a big plus in uncertain times.

Meanwhile, I am generally unenthusiastic about energy and commodities which I think will be subjected to rather negative supply dynamics over the coming few years. There are two basic explanations for this; high prices have attracted large incremental investments during the past decade and human ingenuity is leading to technological breakthroughs which allows for much better usage of existing resources. Valuations may not look high but that’s a transitory phenomenon because an oil stock at 10x with Brent at $120 will be 20x when oil is $60. I don’t see much reason to believe in the super-cycle idea.

SI: Can you share with us how traders can make use of warrants to leverage their trade and take advantage of current trends?
Barnaby: A warrant enables you to gain exposure to a security for a fraction of its price. Warrants tend to move in greater percentages than the underlying shares, allowing for higher percentage returns than if you had bought the shares directly. This is known as the gearing effect and the main reason warrants are so popular.

Macquarie will be the first to launch warrants over the China A50 index on 7 May 2012. The FTSE China A50 index includes the 50 largest A-share companies listed on the Shanghai and Shenzhen stock exchanges, thus giving investors a broad exposure to China. These warrants are listed on the SGX and can be bought and sold just like shares.

Therefore, traders who bullish on the China market, can buy a call warrant over the FTSE China A50 Index while bearish investors can buy a put warrant.

SI: How risky are warrants, especially when compared to stocks?
Barnaby: Warrants are generally not suitable for conservative, risk averse investors as they are broadly considered to be at the high end of the risk/reward spectrum when compared to direct share investment. With warrants there are some other factors to consider:

• Gearing can be a double-edged sword as they can appreciate and depreciate in value more rapidly than the underlying shares.
• Warrants have an expiry date and therefore a limited life. But losses are limited to the capital placed upfront as investors are never obliged to pay anything more than the initial price of the warrant.
• Warrant holders also have a lower capital at risk as warrants do not include margin calls or forced selling.

SI: What advice or insights can you share with our readers on trading warrants?
Barnaby: It is important to know your trading profile, as different risk profiles suit different type of warrant trading strategies. Based on the trading period, traders need to select warrants with appropriate expiry dates, and should also look at the effective gearing levels to gauge the level of their exposure.

Nevertheless, regardless of your risk profile, it is important to exercise strict capital management. If used appropriately, warrants can either increase or decrease your risk. Lastly, be disciplined with your profit taking and stop loss targets. The most successful investors are those that know when to sell.

The content of this article is reproduced with permission from Macquarie Capital Securities (Singapore) Pte. Limited (Registration No 198702912C) (“MCSSPL”), holder of a capital markets services licence under the Securities and Futures Act, Chapter 289 of Singapore. No part of this article may be copied, either in whole or in part, or distributed to any other person without permission from MCSSPL.
This article is not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject, MCSSPL or their respective affiliates to any registration or licensing requirement. The information contained in this article is obtained from sources believed to be reliable and accurate as at the date of publication. Opinions, estimates and other information contained herein may be changed or withdrawn without notice. Any prices and quotes published in this article are purely indicative and for information purposes only. Indicative prices and quotes shown in this article may vary significantly from indicative prices or quotes available from other sources. The information contained in this article is for general information only and while and MCSSPL have taken reasonable care to ensure the accuracy and completeness of the information provided, it will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Investment products are subject to significant investment risks, including the possible loss of the principal amount invested. Past performance of investment products is not indicative of their future performance.

This article is for general circulation only and is not an offer or solicitation to buy or sell, nor financial advice or recommendation for any investment product. It does not address the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a financial adviser regarding the suitability of any investment product before investing or adopting any investment strategies. Prior to buying or selling a warrant, investors should receive appropriate training on warrants characteristics from their broker, from the Singapore Exchange or from one of the issuers. is not a broker-dealer. is not affiliated with MCSSPL or their affiliates and does not pay or receive any fee for the reproduction of this article. Investors should exercise judgment and perform adequate due-diligence prior to making any investment. Macquarie Bank Limited (ABN 46 008 583 542) (“MBL”) is the Issuer of the Macquarie warrants in Singapore and appoints MCSSPL as the designated market maker of the warrants. MBL is regulated as an authorised deposit taking institution by the Australian Prudential Regulation Authority. MBL, acting through its Singapore branch is authorised and licensed by the Monetary Authority of Singapore to carry on wholesale banking business in Singapore pursuant to the Banking Act, Chapter 19 of Singapore and therefore is subject to the supervision of the Monetary Authority of Singapore. MCSSPL is not an authorised deposit taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia), and MCSSPL’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of MCSSPL. MBL, MCSSPL and their affiliates may be involved in financial, investment and professional activities which may on occasion give rise to interests or a conflict of interests in respect of the investment products. MBL, MCSSPL and their affiliates make no representation nor can it give any assurance as to the liquidity in the trading of warrants as the designated market maker may be the only person quoting prices in the warrants. You should visit for more information on warrants and detailed disclaimers/risk disclosures of MCSSPL.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

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