iGP, the Singapore platform for Accredited Investors, has published an interview in their latest iGP magazine. Since I am one of three investment directors providing answers to iGP questions, I wanted to include it here on the blog as well, as you may not be able to obtain the magazine where you are.

For ease of differentiation, my responses are in bold. But that does not mean that the other guys aren’t worth reading.

Titled “Finding Answers Amidst the Volatility”, iGP considers it “…wise to relook at your investment strategies. Find out whatthree investment experts have to say.”

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“With the kind of market volatility we have seen this year…

It has been quite a year. The events in Egyptand Libya affecting the Middle East as well as the catastrophe in Japan early in the year had put some pres-sure on the global markets. Coupled with the ongoing US and Europe debt crisis, investorsfind the markets to be fraught with uncertainties.

We interview Ernest Low,General Manager, Product and Research, Profes-sional Investment Advisory Services Pte Ltd;Rainer Krieg, Associate Director (Investments),SingCapital Pte Ltd; and Victor Wong, Director of Wealth Manage-ment,Financial Alliance Pte Ltd; on the economic outlookfor the coming year.
iGPINSIGHTS (iGP): With thesovereign debtcrisis, are there any investment advantages to be taken from it
Ernest Low (EL): It depends on how one looks at the situation and the time frame. Ifyou are a more aggressive investor and subscribe tothe philosophy of buy-ing low and sellinghigh, you should be finding resources (but not your emer-gency cash) to buy when markets have fallensignificantly.
Valuations are currently looking at-tractive even when factoring in earnings downgrades.However, one should be prudent by breaking newbuys into a few tranches because no one knows when the bottom of the current bear market is reached.In this way, you can dollar cost average your new entrieswhen markets are lower. You should also have a longer term time frame in mind if markets do notturn around quickly enough.
For those who are more wary of the US and European government bonds, you can consider Asian bond funds, short duration bond funds, and total return bond funds. Several of the Asian governments and investment grade cor-porates arein better financial shape than someof the Western nations. However, youmight want to especially focus on thosethat are SGD hedged to minimise foreign currency impact as the SGD re- mains relatively strong against many of theother currencies.
Victor Wong (VW): Our view is that thesovereign debt crisis means risky assets such asequity will find it hard to perform well goingforward as risk aversion heightens. In this kind ofchal-lenging market condition, we are taking a very cautious stance. The primary ob-jectiveis not to get a return out of capi-tal but rather topreserve capital. Hard commodities, such asgold, as part of a well-diversified portfolio should per-form well in this environment.
Rainer Krieg (RK): Presently, the sover-eign debt crisis is ‘limited’ to European countries, and the US.Yet, should there be defaults by any, European or US, government, the fallout on the rest of the world’s economiescannot be ruled out. In today’s globalised world, debtors and borrowers are linkedintricately. Im-agine, Singapore’s primary investment companies, Temasek or GIC, havingto write off a US bond orGerman Bund, arguably an extreme scenario -but not out of the question!
This would be a point in time, when we would no longer just be concerned with the default per se, butwith the struc-tural damage to the financial systems that would be inflicted.Banks, the hold-ers of bonds, are the weakest link in the structure, both inEurope and the US and would probably suffer terminal damage thatwould likely be worse than what banks faced during the 2008 liquidity crisis.These are the thoughts that pre-vent manyfrom looking for investment advantagesthat arise nonetheless!
Atpresent, advantages abound in Singapore bonds as well as Japanese and Swiss bonds, because of the strength in these currencies,and the security its sovereign bonds represent relative to the US and peripheral European peers. This is despite the recent downgrading in Japanese bonds. But such advantages are fleeting opportunities. As soon as the USD regains some strength, foreign bonds will be discarded. The repatria-tion of proceeds back to the US and the USDfollows.
Future opportunities will only arise when all issues surrounding thedebt cri-sisin European countries and the US are tackledat a level that:
Resets parameters ofborrower’s fu-ture liabilities;
Retains a healthy levelof fiscal liquid-ity;
Facilitates a return toa sustainable growth phase in global economies.
Even a conceptual agreement sug-gesting such an outcome would be enough to rekindleinvestor’s appetite for risk and the desire for better returns. Even today, investmentopportunities present themselves in corporate and high yield bond funds,followed promptly by rising equity prices globally.
iGP: How do you think Asia, Middle East and Emerging Markets will fare compared to the US and Europe
EL: The emerging markets are certainly stronger than before with a significant risein the domestic consumption within themselves, thusthey can trade with one another and not solelyrely on the West-ern nations alone. If we are notlooking at a double dip scenario, emerging mar-kets are expected to grow at a moder-ate rate. In fact, this is to bewelcomed as the emerging markets need to take a breather after a very fast recovery right after the GreatRecession. Inflation has been an issue for the emerging markets and some formof slowdown will help them to controlinflation from getting too high.
However, if the developednations fall into a deeper recession, emerging marketswill also take a tumble as we are too integratedwith them to escape. The view that the emergingmarkets have decoupled from the US and European regions is naive. The Western nations are simply too big to ignore. If developed nationsgenerally do not fall into a sec-ond dip, then theemerging markets are one of the best places to be in.

But some of the developednations stocks can be attractive too as a signifi-cant amount of them have tied their growthto the emerging markets. But it would take time formarkets to recog-nise their attractiveness as they arestill perceived as developed nations compa-nies.
RK: Cyclically, the regions are in entirely different economic phases. In addition, Asia and emerging marketsenjoy bet-terfinancial health than the developed world.The Middle Eastern countries are goingthrough their own social restruc-turingstress but continue to play their partas the world’s foremost oil and en-ergyresource.
But we cannot simply disconnect regions as if they are autonomous and insulated from what else is going on glo-bally. Each faltering step in the US and European fortunes will have repercus-sions elsewhere. And yet, the prospec-tive growth in emerging markets, and Asia in particular, might help mitigate much of the negative impact, by rein-forcing growth and consumption in their respective region. How long and successful they can withstand the rever-berationsof a double dip recession in the USand Europe, for example, is a hotly discussedtopic in professional circles. Itwould be wildly speculative of me to makeany definitive assertions here.
If however, the problems of the de-veloped world are reined in, Asia’s wor-ry over inflation andeconomic stagna-tion will disappear.
VW: Looking at the fundamental of the various regions, we think that Asia and EmergingMarkets will fare better going forward. Asia andEmerging Markets are grappling with a potentialstagfla-tion problem, i.e. high inflation and slow economic growth. Hence the primary concern ofmost central banks in the two regions is torein in inflation by tighten-ingmonetary policy.
On the contrary, central banks in the developed markets are keeping interest ratesnear historical low for a prolonged period tostimulate their economies. However,the fiscal position of most Asian andEmerging Markets countries are stillrelatively healthy as compared to USand Europe which are plagued by acrippling sovereign debt problem. Hence,if there is another global finan-cialcrisis, Asia and Emerging Markets central banks have room to lower inter-est rate and the governments have the means to pump-prime their economies.
We are also likely tosee re-allocation of monies from the developed market to Asia and Emerging Markets financial marketsas Fund Managers move monies to regions that havebetter fundamentals plus potential of currencyappreciation relative to their home currency.
iGP: What is your take on the slow eco-nomic growth and high inflation rate
VW: The loose monetary policyglobally plusvarious policy measures such as quantitativeeasing undertaken by the developedmarket central banks have resulted in a lot of liquidity in the global financial system. The abundant liquid-ity has found its way into the Asian and Emerging Market economies, resulting in high inflation while economic growth hasremained subdued.
My take is that above average infla-tion rate is likely to stay for a while in Asia and Emerging Markets aslong as global interest rates are kept artificially low. In fact, over the next 2 years, this low interest rates environmentis likely to persist as the US Federal Reserve has pledged tokept short term interest rates unchanged overthe next 2 years. In this kind of sloweconomic growth with higher thanaverage inflation, commodi-ties suchas gold will again perform well as commoditiesbesides being a good inflation hedgeis also a good store of value inuncertain times. Hence, having someexposure to commodities will help in portfolio diversification.
RK:Talkto Europeans and ‘slow econom-ic growth’is the preferred scenario rather than hot and bubbly. Americans are des-perately looking for growth because they got loans to (re-) pay, while in Asia, gov-ernments are reining in excessive growth tomitigate rampant inflation.
What the Europeans are concerned with is that the Euro remains stable, as it will allow the regionto stay in control of external inflationary pressures. They would not mind if the currency loses some strength, as it mightcontribute to easing thepressure of the large debt burden.
The American government and the Fed are playing down the risks of infla-tion, stating that slowergrowth impedes the rise in goods and services, which would lead to a reduction in inflation rates in the comingmonths. There is still a notion that a lower USD will resolve the debt issuesfaster/easier, but many now realise that this is a two-edged sword, as it disconcerts thedeployment of local and foreign investment in the US, and USD.
In Asia, we experience inflation as a real threat to our buying power,and we getrestless wondering whether to de-mand higher salaries, go on strike, or replace a non-performing government. A slowdown in economies would therefore not really pose such a great danger to our regionas it is made out to be, unless you have acompany that is leveraged to the hilt (andbeyond) betting on 20% growth everyyear just to break even. Hopefully, thistype of 1997/8 excesses will not be repeatedin the short term.
Asevery above party in this global context has different preferences, theresulting outcome will probably be a contentious compromise at best – ora muddle where everyone serves only his own interests. That’s yet another Pandora box toopen eventually, imposing more changes to the longer-term outlook.

EL: Inflation is only high in the emerg-ingeconomies but not a real problem for most of the developednations. Inflation often reflects the state of the economies. As the emerging economies havebeen growing very well in the last few years, inflation has become a prob-lem. Therefore the respective govern-mentshave been employing inflation controlling measures suchas raising interest rates, raising banks required reserveratios, property cooling meas-ures, and appreciatingtheir curren-cies. However, commodity prices have softened somewhat in the recent past and inflation islikely to peak soon for many of the economies. As long as the emerging economies’ growth start to moderate, inflation will likely moder-atedownwards too.
However,there is always a possibil-ity that we mayface low growth and high inflation ifthere are constraints in commodityprices. For example, if there arepoor weather conditions in the food producingnations, prices of agricultural relatedcommodities will likely go up.
But base metals and energy prices havehigher correlation to the global economic growth. So ifthe whole world slows down dramatically, including China andIndia, commodity prices will be softer andso will inflation. Of course inflationis also made up of property prices, transport, education, and other components. But it is difficult for many ofthese other factors to remain high if globaleconomies are impacted nega-tively.
On the other hand, the developed na-tions arenot experiencing high inflation as theyhave spare capacity and high un-employmentwhich keeps prices more controlled.So this is not an issue that is a key concern for now. Rather, theirfocus is more on growth, job creation anddebt management.
iGP: Which investment classes deserve the heaviest weightage in an investor’s portfolio for the coming year
RK: A year is a long period andthe com-ingtwelve are prone to frequent turna-boutsin various economies.
My strongest conviction over 12 months:
An 8-10% weighting ongold, not gold stocks, butgold prices;
The inflation theme I talked about in the beginning of 2011 remains in full swing, hence we need toinclude sen-sible weightings on defensive equity, dividend yielding stocks and prop-erty REITS.
But in the short term, i.e. over the comingsix months, I would also put a strong focuson the materials, energy and techsector, rounded up by the almost perennialconsumption theme –as soon asinvestment conditions look less daunt-ing. Seasonally, September is a month of change, and if the changeis ushered in by way of enlightened political and fis-cal decisions, this could turn out to be a splendid starting pointfor a good rally in stocks and other real assets.
VW:Due to our cautious stance current-ly, we are positioning our clients’ port-folio more into short duration Singapore bonds, principally to preserve capital. We believe that markets will continue to be volatile going forward, giving us opportunities to move back into equity marketin the future.
EL: That really depends on the clients’ risk profile. Forthose who are aggres-sive in nature and take a longerterm view, Emerging Markets equities would look more attractive whenever there are significant marketfalls.
For those who are more conservative in nature, Asian bond funds, short dura-tionbond funds, and total return bond funds are some of the instruments they can consider.
iGP: What kind of alternative invest-ments can help in this current market situation
VW: We advocate having some exposure tothe hard commodities such as gold and preciousmetals for portfolio diver-sification. In times of uncertainty, real as-sets such as gold will do well as investors look for safe haven to parktheir monies. However, the trade-off is that commodi-ties is a very volatile asset class, hence alarge exposure to a hard commodities fund might skewthe risk of the portfolio without adequatecompensation on the return aspect.
Another alternative investment that might potentially do well is the Managed Futures strategy. Thisis a trend follow-ing strategy which haslittle correlation to the equitiesand bonds markets. In the last financialcrisis in 2008, this Managed Futuresstrategy delivered double digit positivereturn while equities market andcorporate bonds suffered one of the worst negative returns in capital market history.
RK:Alternative investments have yet to deliver on their promises during vola-tile, uncertaininvestment conditions. As with equity funds, alternative strate-gies, too, need ‘trending markets’, ideal investment conditions tocapture and accumulate gains. Uncertainty, however, is notsuch a stimulating feature. Since so fewof alternative investment fund managers are active and suc-cessfulin managing risk, alternative in-vestmentsas a separate asset class will continueto see an underperformance vis–visan actively managed portfolio, whichrotates asset allocations in line with trends.
EL: In bearish periods, managed futures andvolatility funds can thrive. They can also be a formof risk hedging tool if markets remain bearish. However,one should also note the currency of the in-struments. Gainsmade on these instru-ments may be offset to a certain extent if the SGDstrengthens against the instru-ments’ currency. So do try to invest inSGD-hedged versions if they are avail-able,if you are a SGD investor.
iGP

And then there is the magazine’s disclaimer:

CTOBER 2011 – MARCH 2012 59

Article disclAimer: This article is not to beconstrued as an offer or solicitation for the subscription, purchase or sale ofany fund. No investment decision should be taken without first viewing a fund’sprospectus. Any advice herein is made on a general basis and does not take into account thespecific investment objectives of the specific person or group of persons. Assome of the authors/contributors may have a personal interest in some of thefunds commented on, investors should seek the advice of professional advisersregarding the evaluation of any product, unit trust or other financialinstruments, report, index, opinion or any other content contained herein, toensure the investment instrument is suitable for them. In the event thatinvestors choose not to seek advice from a professional adviser, they should considerwhether the investment instrument is suitable for them. Past performance andany forecast is not necessarily indicative of the future or likely performanceof the fund. The value of units and the income from them may fall as well asrise. Opinions expressed herein are subject to change without notice. iFASTFinancial and/or its licensed financial advisers representatives may own orhave positions in the funds of any of the asset management firms or fund housesmentioned or referred to in the article, or any unit trusts or SingaporeGovernment Securities bonds related thereto, and may from time to time add ordispose of, or may be materially interested in any such unit trusts orSingapore Government Securities bonds.