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8/7/2019 GIP FEB2011
http://slidepdf.com/reader/full/gip-feb2011 1/14
IN THIS ISSUE
1 Highlights
2 Short-term Investment
Outlook
4 Macro Assessment
6 Equity Markets
9 Fixed Income
11 Other Investments
12 Currency
13 Sukuk
HighlightsDuring January, renewed investor risk-appetite sawequities perorm strongly overall, although degreeso perormance varied among regions. In developedmarkets, the eurozone was the standout perormeras news-ow over sovereign debt concerns wasappeased by successul debt auctions in Italy, Portugaland Spain. Eurozone investor sentiment was urtheraided by pledges o assistance rom the EuropeanCentral Bank, Japan and China. Looking aheadhowever, sovereignty debt concerns will remain untilgovernments reach a clear and permanent solution.
On the macroeconomic ront, the US benefted romrising investor confdence as consumer spending,manuacturing fgures and existing home salessoared, supporting positive economic growth. Overall,
the health o the US economy appears to haveimproved rom previous subdued levels and investorexpectations have risen as a result. Within developedcountries, however, high unemployment levels persistamid weak labour markets.
In emerging markets, economic data remains strongand governments continue to tighten monetary policy.In China or instance, the economy grew aster-than-expected in the ourth quarter, with gross domesticproduct up 9.8% rom the year-earlier, and up 10.3%or all o 2010. Meanwhile, consumer ination hit4.6% year-on-year in December. Consequently, thePeople’s Bank o China ordered lenders to increasetheir reserve requirement in an attempt to dry up
liquidity to get ination under control. Alongside China,central banks in Brazil and India ollowed suit.
January Market RecapDuring January, global equity markets, as measuredby the MSCI World index, rose by 2.2% as the globaleconomic recovery gained momentum and sovereigndebt concerns in the eurozone were appeased bysuccessul debt auctions in peripheral countries.
In contrast to preceding months, global equityreturns were particularly robust within developedmarkets, which outpaced their emerging marketcounterparts. Over the month, emerging marketssuered a correction as the MSCI Emerging Marketsindex ell by 2.1% enguled by ination concerns andpossible interest hikes. Similar to developed markets,
the variation in returns rom individual countries inemerging markets was signifcant. Russian stockswere an exception as they bucked the trend by risingduring January. Elsewhere among the BRIC countries,Chinese Brazilian and Indian equities posted hetylosses, with the latter alling by over 10%. In Egypt,stocks spiralled downwards amid the growing politicalunrest though this had limited impact on the wideremerging market index.
While growth within emerging countries remainsrobust, the rate o growth is decelerating. Risingination and the possibility o urther interest hikesremain at the crux o the nervousness amongemerging markets.
February 2011
Global Investment Perspective
Outlook & StrategyWhile the global economic recovery is making progress, conditions remain challenging and growthuncertainties persist. Thereore, our central scenario remains unchanged. Overall, we anticipate positive,albeit moderate, sub-trend economic growth in developed economies in 2011. Furthermore, we alsoexpect ongoing strength in emerging economies. Our main concern here is the prospect o urthermonetary tightening, which would impact global growth prospects, given that emerging economieshave been an important engine behind the global economic recovery to date.
In the developed world, the key risks on the economic horizon remain fscal tightening and weakconsumption. The prospects or labour markets and consumption remain unclear, despite some signs ostabilisation. Unemployment rates are stil l elevated and consumers are still endeavouring to unwind debtpositions, particularly in the US and the UK.
At an asset class level, we started a modest overweight position in both developed and emerging marketequities relative to cash and government bonds. The market remains ushed with liquidity, given not onlycapital injections by central banks but the high levels o cash on corporate balance sheets. This is positiveor equities as it gives companies the exibility to invest, expand and drive earnings growth, or raisedividend payment to increase shareholder returns. Equities are supported by the positive collectivebackdrop o improving economic data particularly in the US, reasonable earnings growth orecasts or2011 and undemanding stock valuations, not least relative to cash and government debt.
At the sector level, while valuations remain attractive or healthcare and telecommunications stocks on anabsolute basis, the valuation gap relative to other sectors is less compelling. Thereore, we no longer havea relative preerence or these two sectors.
Within the context o developed market equities, we maintain a preerence or Japanese equities wherewe maintain a tactical short-term overweight position as valuations and equity undamentals remain sound.Presently, this scenario remains unchanged irrespective o the recent credit rating downgrade o Japanesesovereign debt by Standard & Poor’s. Within the emerging markets, we continue to avour Russia onthe basis o attractive stock valuations on both a relative and absolute basis, and signs o improvingeconomic conditions.
In fxed income, with ination under control in the developed world with the exception o the UK,we believe central banks are likely to keep interest rates low, which is broadly supportive o fxed incomemarkets. Within the fxed income universe, our preerence continues to ocus on developed marketcorporate bonds, particularly high yield which we believe oer value on a total-return basis.
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ASSET CLASS CURRENTVIEW REASONING
EQUITY
Global Developed
Market EquityNeutral
• Equity valuations relative to cash and especially government debt remain
attractive, plus liquidity remains supportive. There continue to be risks to the
economic recovery, but our core scenario is or positive, but sub-trend growth.
US Equity Neutral• Whilst unemployment remains elevated at 9.6%, Fed policy has remained
accommodative and recent economic news-ow has been encouraging.
Europe Equity
(including the UK)Neutral
• Economic conditions remain mixed. UK growth has slowed, austerity
measures are in the process o being rolled out in parts o Europe and the
economic health o peripheral eurozone countries remains uncertain. That said,
interest rates and ination remain generally low (the UK being an outlier), the
Bank o England has agged the possibility o a urther round o quantitative
easing, and recent corporate earnings news in Europe has been encouraging.
Japan Equity Positive
• We have a tactical, short-term preerence or Japanese equities as they lagged
other developed equity markets or much o 2010 and, having recently started
to outperorm, are likely to have positive price momentum. There are also early
signs that ows are becoming more supportive. Japanese stock valuations
look attractive relative to history both in absolute terms and relative to other
developed markets.
Asia ex-Japan
EquityNeutral
• From a macroeconomic perspective, the outlook remains generally positive
with strength in both the manuacturing and consumer sectors. However,
rom a valuation perspective, market prices have largely reected the positive
news-ow.
Hong Kong and
China Equity
Neutral
(3-6 months)
Positive
(6-12 months)
• We turned rom positive to neutral on a 3-6 months view. Though stocks
are not at expensive levels, we are increasingly concerned about monetary
tightening measures to curb ination.
Global Emerging
MarketsNeutral
• Emerging countries are likely to continue to lead the recovery due to robust
domestic consumption and strong intra-regional trade. That said, like developed
markets, emerging market equities are exposed to volatility stemming rom
the question marks around the sustainability o the global economic recovery.
Latin America
EquityNeutral
• The economic perormance o Latin American countries remains strong and
earnings growth estimates or 2011 look reasonable. Having said that, the
good news seems to be well reected in market prices and relative valuation
measures show no strong signals. We, thereore, retain our neutral stance.
Middle East Equity Neutral
• Economic data rom the region has been highly encouraging and 2010-2011
orecasts are positive. In addition, valuations remain reasonable. Key risks include a
slowdown in global demand or oil and the potential deterioration o budget defcits
among some o the countries in the region.
Eastern Europe
EquityNeutral
• Manuacturing data has varied within the dierent countries. Weak labour
markets, high levels o government debt and ongoing concerns about eurozone
debts are weighing on the outlook or the broader region. However, at a
country level, we avour Russian equities. Valuations or Russian equities are
attractive in both absolute and relative terms.
FIXED INCOME
US Government
BondsNegative
• Excess capacity in developed markets and the renewed commitment o key
central banks to remain accommodative are generally supportive or low yields.
However, despite the recent rise in yields, the market is still oering little value
relative to history and, downside risks remain. Within fxed income, we preer to
own corporate debt, where we see greater total return opportunities.
EURO Government
BondsNegative
• We have a negative stance on eurozone government bonds relative to cash. This
is due to uncertainties regarding the economic health o eurozone peripheral
countries. In addition, valuations o these bonds do not look particularly attractive;
they oer very limited protection against negative surprises.
Short-term InvestmentOutlook (6-12 months)
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3
Summary
Overall, we have implemented a moderate overweight position in global equities relative to both government bonds and
cash. Within equities, we have closed out our preerence or healthcare, telecommunications and consumer staples stocks as
the valuation gap relative to other sectors has converged making these sectors less attractive on a relative basis. Within the
context o developed markets equity, we remain positive on Japan on a short-term perspective partly due to attractive stock
valuations and positive price momentum and ows. Within emerging markets equity, our avoured market is still Russia.
In fxed income, we have a negative view on government bonds relative to cash, although less so than last month. However,we have a positive stance on corporate debt – both investment grade and high yield. Positives or corporate bonds include
attractive valuations and avourable issuer undamentals. Our central economic scenario is or slow but positive growth in the
major developed markets, a backdrop which is typically positive or credit markets.
With regard to the our major developed market currencies, it is likely that heightened volatility will continue. Valuation
measures are not currently providing strong signals and we thereore, have a neutral stance on currency positions.
FIXED INCOME
Asian GovernmentBonds
Neutral • With the recent rise in US treasury yields and tight spreads in AsiaGovernment USD bonds, we maintain our neutral recommendation.
Investment Grade
CorporatePositive
• Strong corporate earnings results, the view that major central banks will keep
interest rates low and strong demand or yield have boosted investment grade
corporate bonds. With momentum likely to remain positive, we continue to be
positive on the asset class.
High Yield Bonds Positive
• High yield bonds continue to look attractive on a total return basis. We have
retained our positive view on the asset class given better-than-expected
corporate results, declining deault rates and growing expectations that interest
rates could remain anchored at their current low levels due to growing global
economic growth uncertainties.
Sovereign US
dollar denominated
Emerging Markets
Debt
Negative
• Sovereign US dollar-denominated emerging market debt continues to look less
attractive on valuation grounds than developed market corporate debt, and high
yield in particular.
Global Developed
Ination-linked
Bonds
Negative• The sell-o in nominal bonds makes the global ination-linked bond market
more expensive and the nominals less expensive.
OTHER
INVESTMENTS
Oil
Between
the rangeo US$70 to
US$90 per
barrel
• We expect the oil price to uctuate in the US$70-US$90 range, as improved
demand is balanced out by a orecast rise in OPEC production. Fluctuation in
risk-appetite is likely to contribute to oil price volatility.
Gold
Neutral
Betweenthe range o
US$1,250 to
US$1,400 per
troy ounce
• We are neutral on gold now as opposed to having been somewhat negative
in previous months. Moves by the US Federal Reserve to add urther liquidityto markets, combined with ongoing macroeconomic uncertainty, remain
supportive actors or this precious metal. Against this backdrop, we expect
gold will trade in a between a range o US$1,250 to US$1,400 per troy ounce
in the near-term.
Commercial
Real Estate
(unlisted markets)
Neutral
• High unemployment, alling occupancy rates and declining rental values
in the US and Europe warrant a cautious/ negative outlook or these two
markets in general. Our short-term outlook or the UK has deteriorated, with
weaker rental and capital growth projections, although we are not expecting
a signifcant price correction as yields remain above our view o long run air
value. The outlook or Asia Pacifc is improving, although there is wide regional
divergence.
CURRENCYEUR, GBP, JPY
and USDNeutral
• Valuation indicators are not sending any clear signals at present. We see both
event-driven and sentiment-driven risks contributing to ongoing volatility. We thus
continue to have a neutral view on currency exposures.
Short-term Investment
Outlook (6-12 months)
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US
The economic recovery made good progress in the US, despite
some disappointment in labour data.
• GDPgrowthwasparticularlyencouraginginthefourthquarter,
coming in at an annualised rate o 3.2% year-on-year, as personal
consumption grew by 4.4% year-on-year. Manuacturing activity
remained a key as well, with industrial production accelerating to
0.8% month-on-month in December.
• Nevertheless,labourmarketconditionsshowedlacklustre
improvements as non-arm payrolls rose by less-than-
anticipated 36,000 in January. The unemployment rate
declined to 9% but jobless claims still gave mixed signals
throughout the month.
• Theconcernwasreinforcedlaterinthemonth,asadvance
retail sales growth unexpectedly slowed, rom 0.8% m-o-m
in November to 0.6% month-on-month in December and the
University o Michigan Confdence indicator dropped to 72.7.
• Turningtoination,theallitemsConsumerPriceInation
index climbed by 1.5% year-on-year in December, abovethe consensus estimate, driven by a sharp increase in
commodity prices.
Europe ex-UK
While there continued to be signs o an economic recovery or
the eurozone region as a whole, some country level data is still
a concern.
• Industrialactivitywassolid,withtheeurozonePMIindex
coming in above both the consensus and November reading.
Industrial production growth was encouraging as well.
• Nevertheless,thesituationintheservicessector(andretail
in particular) remained difcult. Retail sales disappointed in
November, dropping by 0.8% month-on-month, reecting
the impact o ongoing high unemployment on household
consumption.
• TheEurozoneunemploymentratewasunchangedin
November, at 10.1%, while household consumption grew
less-than-expected by the consensus in the third quarter, at
0.1% quarter-on-quarter.
• Furthermore,thesharpcontrastbetweenthesolid
perormance o the larger economies o France and Germany,
with the peripheral eurozone countries persisted.
• Fiscalissuesremainedthemainareaofconcern,with
Portugal the latest subject o speculation.
The economic recovery is gaining momentum. Global manuacturing activity was robust and emerging
economies continued to impress. However, there are still key risks to watch on the horizon.
UK
While manuacturing activity was positive, the economic news-
ow disappointed in January.
• TheUKPMIroseto58.3inDecember,wellabovethemarket
expectation, while industrial production was also encouraging,
growing by 3.3% month-on-month.
• However,GDPcontractedby0.5%quarter-on-quarterinthe
ourth quarter. While the adverse weather conditions during
the traditionally busy estive season played an important
role in the all in economic activity, fscal tightening and low
consumer spending were other key actors. Indeed, retail
sales were down 0.3% in December.
• Furthermore,unemploymentstayedhigh,at7.9%in
December, overshadowing the mild improvement in jobless
claims. Mortgage approvals remained low in November,
which is indicative o a wider trend o consumer trepidation.
• Turningtoination,year-on-yearConsumerPriceInation
rates increased sharply in December to 2.9% and 3.7% or
the core and all-items indices respectively.
• OfadditionalconcernwasthattheDecemberjumpinination
excludes the eect o the VAT increase which came into
eect on 1 January 2011.
Macro Assessment
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Japan
Economic data was mixed in January, although exports
growth improved.
• Japan’sexport-orientedsectorscontinuedtoshowsome
strength, helped by China’s growth and a stronger recovery
in the US. Industrial production rose by 3.1% month-on-
month in December, and exports posted a 13% year-on-year
increase in the same month.
• Nevertheless,therecontinuestobeweaknessindomestic
demand and labour markets. Consumer confdence declined
in December, while nationwide retail sales ell ater declining
0.5% year-on-year a month earlier. Meanwhile, overall
household spending declined in December.
• Ofadditionalimportance,therewasrenewedconcern
surrounding the level o government debt in Japan.
• Despitethenation’sgovernmentpledgetoturnitsannual
budget defcit into a surplus by 2020, S&P downgraded the
long term sovereign debt rating o Japan, rom ‘AA’ to ‘AA-’,
highlighting its concern over the nation’s growing debt burden
and the difculties it may ace to restore its fscal balance.
• Japan’scoreConsumerPriceInationrateremainedin
negative territory, at -0.7% year-on-year. Such rates continue
to underscore the weakness in Japanese consumer activity
and to show that the ongoing deationary conditions are little
changed. On the positive side, this will allow the Bank o
Japan to retain its accommodative stance.
Macro Assessment
Emerging Markets
Economic activity continued to impress, although combined
with ongoing high ination levels, this could lead to urther
monetary tightening.
• Indicatorsofindustrial/manufacturingactivityshowedrobust
reading across the emerging market region. For instance,
China’s GDP growth beat the consensus orecast, coming
in at 9.8% or the ourth quarter, which was well above the
reading or the third quarter.
• Turningtoconsumeractivity,year-on-yearretailsaleswere
strong, beating the consensus estimates in Brazil, China,
South Korea and India.
• Thegoodreadingswerenotlimitedtothemajoreconomies,
but improvement was also noticeable in wider EM region.
This was particularly true in Latin America, where the
Economic Activity Index rose above the consensus
expectations in Argentina and Chile.
• ThesituationinCentralandEasternEuropehasshown
encouraging signs o improvement, largely driven by the
robust expansion in Germany (the region’s major economic
partner). There were ongoing positive readings in Russia, as
well as in the rest o the region.
• Turningtoination,Chinaremainedthecentreofattention,
with ination coming in at 4.6% in December. China raised
its Reserve Requirement Ratio to the highest level on record.
Inationary pressures generally intensifed in emerging
markets. Food ination continued to be a major driver o
price movements.
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Global Developed Markets
• Liquidityisexpectedtoremainapositivefactorforequity
markets in general given central bank stimulus and
quantitative easing in the US.
• Despitemodestlyhigherlevelsofinationindeveloped
nations, central banks are likely to maintain accommodative
monetary policies in 2011.
• Valuationsinallmajorequitymarketsareatundemanding
levels, and macroeconomic data is improving.
• Therefore,astheimprovingbackdropforequitiesisbecoming
more evident, we have moved to a modest overweight
position in equities against cash and government bonds.
US
• TheUSmacroeconomicpictureimproved,althoughrisk
persists. Overall we reiterate our central scenario o positive
growth in 2011 and 2012 or the US.
• UScompaniescontinuedtoperformgenerallywell,whilethe
earnings growth estimate or 2011 stood at 14.9% in January,
a level in line with the broader developed markets and with
our assessment o the US economic picture.
• Furthermore,astheFedmaintaineditsaccommodative
monetary stance and is perusing its second round oquantitative easing, liquidity is likely to remain a positive actor
or US (and other) equities.
Europe
• AlthoughfourthquarterGDPgrowthintheUKwasnegative,
overall, economic activity has improved in both the UK and the
Eurozone. We continue to expect moderate growth in 2011.
• Fromavaluationperspective,EurozoneandUKequitiesare
trading at reasonably undemanding levels, with their 12-month
orward price to earnings ratios at 10.8x and 10.5x respectively.
• Inaddition,despitemodestlyhigherlevelsofination,centralbanks are likely to maintain accommodative monetary policies
in 2011.
Japan
• TheeconomicoutlookforJapanremainspositive,despite
signs o consolidating ater the strong third quarter GDP
fgures. Overall, the economic backdrop remains encouraging
and in line with our central scenario or positive economic
growth in 2011.
• TheearningsgrowthprospectofJapanesecompaniesfor
2011 stayed reasonably solid, at 12.6%. Furthermore, the
negative impact o the strong JPY on exports has been
diminishing, suggesting a brighter horizon or Japanese
exporters, while the improvement in labour markets could
lead to a rebound in domestic consumption.
• Fromavaluationperspective,Japaneseequitiesweretrading
at a 12-month orward price earnings ratio o 14.0 at the end
o January. This compares to 13.6 a month earlier, which
remains an attractive level relative to history.
• Againstthisbackdropandtheongoingsupportivehigh
liquidity environment or equities in general, we have
increased our allocation to Japanese equities versus cash
and government bonds, as we did in other equity markets,
and retained our preerence or Japanese stocks against the
broader developed equity universe.
Global-Emerging Markets
• Therecentcorrectioninemergingmarketequitiesonan
absolute basis and relative to developed equity markets is, in
our opinion, just that and we do not expect this to continue
or a prolonged period. I the ination picture deteriorates
triggering urther aggressive tightening, this view may change
but in such a scenario, the probability is that all equities and
other risk assets would be vulnerable as global growth could
be threatened.
• WecontinuetolikeRussianequitiescomparedtoother
emerging markets. Macroeconomic data has been
encouraging, the rouble is strengthening and the valuations
remain extremely attractive.
• TheunrestinEgyptclearlyhasamajorimpactonthecountry
and is important to the wider investment world because o
the region’s oil supplies. Political change looks highly likely but
it is hard to make any meaningul comment on the medium
term investment impact while events are still unolding.
Equity Markets
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Equity Markets
Hong Kong and China
• China’sstrong4Q2010GDPgrowthof9.8%andrising
ination risks have increased the pressure or the government
to tighten policies more orceully through both monetary and
administrative tools.
• Thoughstocksarenotatexpensivelevels,weareincreasingly
concerned with the monetary tightening polices to curb
ination.
• Marketscouldstayrangeboundwithdifcultytoachievea
meaningul upside.
• Intheneartermwearealsoseeingfundowsfromemerging
markets moving back to developed markets. We turnedneutral or the China and Hong Kong equity markets.
• Butona6-12monthsview,weremainpositiveastightening
ears are expected to recede.
Asia ex-Japan
• Fromamacroeconomicperspective,Asia-exJapan
continued to show solid perormance and is expected to stay
strong or the remainder o the year. However, the potential
or monetary tightening in key countries could moderate the
pace o improvement.
• Fromavaluationperspective,Asiaex-Japanequitieswere
trading at a 12 month orward price earnings ratio o 12.7x
at the end o January, which was marginally higher than a
month earlier.
• Earningsgrowthforecastsfor2011continuetolook
attractive, at 13.8%, which is, in our view, in line with the
current economic conditions.
• Attheequityassetclasslevelthough,weretainourneutral
stance or Asia ex-Japan markets relative to other equity
markets, as specifc risk surrounding monetary policies
remain and valuation levels show no strong signals.
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Equity Markets
Latin America
• TheeconomicperformanceofLatinAmericancountries
remains strong and earnings growth estimates or 2011 look
more reasonable.
• Havingsaidthat,thegoodnewsseemstobewellreected
in market prices and relative valuation measures show no
strong signals.
• Ongoingglobalowsfromthedevelopedtotheemerging
world, uelled by continued low interest rates in the developed
world, continue to present a problem to emerging economies.
• Brazil,thelargestmarketinLatinAmerica,hasalreadyraised
the tax on certain investments by oreigners rom 2% to 6%in an eort to stem currency appreciation.
Middle East
• TherehavebeenmacroeconomicimprovementsintheMiddle
EastandNorthAfrica(MENA)region.Qatarhascutits
interest rates while Dubai has stated it does not require the
support o its central bank anymore.
• GrossDomesticProductgrowthexpectationsarepositive
or both 2010 and 2011, although there are downside risks.
Valuations remain undemanding but given the risks to
economic growth and the narrowing valuation discount to
emerging markets, we remain neutral on MENA versus other
equity markets.
• TheunrestinEgyptclearlyhasamajorimpactonthecountry
itsel and is important to the wider investment world because
o the region’s oil supplies.
• PoliticalchangeinEgyptlookshighlylikelybutitishard
to make any meaningul comment on the medium term
investment impact while events are still unolding.
Eastern Europe
• WemaintainourpreferenceforRussianequitieswithinthe
wider emerging markets universe, as we continue to think
valuations are attractive on a relative basis.
• InEasternEurope,ConsumerPriceInationindicesincreased
across the major countries. However, given the outlook or
domestic demand in this part o the emerging markets world,
the risk o policy changes remains lower than in Asia and
Latin America.
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US Government Bonds
• Overall,thegenerallyimprovingmacroeconomicenvironment
continues to support our modestly cautious view on US
treasuries relative to other asset classes.
• TheFederalOpenMarketsCommitteetooknoteofthebetter
news on economic activity in recent weeks, but avoided
sending any signal that it was yet reconsidering the existing
quantitative easing plan or purchases o treasury securities
through to June. The Committee also continued to highlight
that overall conditions are likely to warrant exceptionally low
levels or the ederal unds rate or an extended period.
• Fromavaluationperspective,althoughinationarypressures
and ination expectations remain muted, current yields are
not particularly attractive relative to history.
• However,yieldshaverisensomewhatinrecentmonths
making valuation levels less stretched. We thereore have a
neutral view on US treasuries relative to cash.
• Withinxedincomemarkets,ourpreferenceremainsfor
corporate bonds, both investment grade and particularly
high yield.
Eurozone Government Bonds
• Theoverridingmoodinthenancialmarketsisstillvolatile
and uncertainties regarding the economic health o eurozone
peripheral countries remain, more particularly surrounding the
risk o some orm o sovereign deault.
• Althoughthebondmarketsofperipheraleurozonenationsare
priced to compensate or some risk, the fnal solution to the
debt difculties is not clear making it hard to evaluate whether
the pricing is sufciently attractive.
• Therefore,againstthisbackdrop,wemaintainasomewhat
cautious outlook or eurozone government bonds against
cash although the recent increase in yields has mitigated this
caution to some extent. Overall, within fxed income, our
preerence remains or corporate rather than sovereign debt.
Asian Government Bonds
• RecentheadlineshaveshiftedthefocusawayfromEurope
to Japan and Egypt. Japan sovereign rating was downgraded
by S&P, citing its weak fscal position with high debt levels.
Meanwhile, political unrest in Egypt continued to weigh down
markets. These developments had some spill-over eects on
Asian credit resulting in wider spreads overall.
• FormosteconomiesinAsia,inationnumbershavebeen
higher-than-expected largely driven by the increase in ood
and commodity prices. The ination indicators are generally
expected to remain high over the next ew months.
• WeremainneutralonAsiaGovernmentUSDbondswiththe
recent rise in US treasury yields.
Investment Grade Corporate Bonds
• Therewereencouragingsignsofimprovementineconomic
activity in January, particularly in the US, and a backdrop o
moderate economic growth is broadly positive or corporate
bonds as it should beneft company balance sheets.
• Thisissupportedbytheexpectationsforearnings
growth in 2011, at 14.9% or the US and 15.3% or the
developed countries.
• However,giventheongoingpressureongovernmentbond
yields, current spread levels, albeit attractive in relation to the
very low ofcial interest rates in developed countries, do not
provide much cushion should government bond yield rise.
• Thereforeagainstthisbackdrop,wehaveretaineda
preerence or investment grade corporate bonds relative to
government bonds, but continue to avour high yield bonds
within developed corporate bonds, as their extra yield oers
more protection should government bond yields rise.
Fixed Income
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Global Ination-Linked Bonds
• Indevelopedeconomies,inationisexpectedtoberelatively
contained in the near-term, as high unemployment and tighter
fscal policies are likely to weigh on growth.
• Thesell-offinnominalbondsmakestheglobalination-linked
bond market more expensive and the nominals less expensive.
• Whileweretainanunderweightstanceonination-linkedbonds,
our view has turned less negative as the relative valuations
versus conventional government bonds have improved.
Fixed Income
High Yield Bonds
• Thegeneralthemeincreditsofarin2011hasbeenthestrong
perormance in high yield corporate bond issues, relative to
investment grade issues.
• Ourtacticalpreferenceforhighyieldcorporatedebthas
thereore continued to prove rewarding.
• Theunderpinningofthehighyieldbondmarketremainsvery
supportive, with declining deault rates, abundant liquidity
conditions, attractive valuations and notable improvements
in corporate balance sheets. Corporate earnings also remain
reasonably strong with ourth quarter results largely beating
expectations in terms o both earnings per share and revenues.
• Overall,weretainourpositiveviewoncorporatebonds.
Within this, we continue to have a preerence or high
yield corporate bonds over investment grade, as valuations
appear more attractive and the asset class is somewhat less
correlated to a rising yield environment which remains a risk in
developed market government bonds.
Sovereign US dollar-denominated Emerging Markets Debt
• Aspolicymakersindevelopedeconomiesarelikelyto
maintain accommodative monetary conditions throughout
2011, the higher yields oered by emerging market debt
should remain appealing.
• However,withinationrisingorstayinghigh,whileeconomic
activity continues to grow at a ast pace in many emerging
economies, the likelihood or central banks to raise interest
rates urther is high.
• Furthermore,giventhateconomicreadinghavebeenbeating
the consensus estimates in several cases, it is possible that
rates will need to rise urther than currently expected (i price
pressures do not recede).
• Overall,ourinvestmentoutlookforthisassetclasshasnot
changed. We continue to preer developed market corporate
debt to US dollar-denominated emerging market sovereign debt.
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11
Other Investments
Oil
• TheoilpriceincreasedslightlyfromUS$91.4perbarrelatthe
end o December to US$92.2 per barrel at the end o January.
Early in the month, the price declined beore moving sharply
upwards at the end o the month as political tensions in Egypt
escalated.
• GlobalcrudeoildemandcontinuedtostrengtheninDecember
while supply ell as non-member o the Organisation o
Petroleum Exporting Countries (OPEC) output was reduced
as a leakage o an Alaskan pipeline disrupted supply.
• TheInternationalEnergyAgencyrevisedupits2011forecasts
or global oil demand, reecting stronger than expected
economic growth and cold northern hemisphere weather.
• OPECcrudeproductionisprojectedtoriseslightlythrough
2011 to accommodate increasing oil consumption.
• However,commercialoilinventoriesheldintheOrganisation
or Economic Co-operation and Development remain high and
are likely to contain signifcant price momentum.
• Balancingononehand,theexpectedpick-upindemandand
on the other, the degree o spare capacity, we maintain our
orecast price range o US$70-90.
Gold
• ActionsbytheUSFederalReservearelikelytocontinueto
provide liquidity and potentially weaken the US dollar urther,
both o which are likely to drive commodity prices, including
gold, higher.
• Inaddition,ongoinguncertaintysurroundingthesustainability
o the economic recovery remains, adding to the
attractiveness o holding the metal.
• However,somefactorsremainunsupportive,likethethreatof
higher interest rates outside the US, as has been the case in
some developing economies.
Commercial Real Estate
• TheUKremainsourpreferredmarketoverthemedium-to-
long-term due to the yield level which, although lower than
last summer, sufciently prices in the weak occupier market.
However, we expect a dip in perormance in the short-term.
• AsiaPacichasthestrongestrentalgrowthprospects,
particularly in the short-term, although recent strong capital
value growth has reduced yields to an unattractive level, with
the potential or a correction in values over the medium-to-
long-term.
• IntheUS,despiteweakoccupiermarkets,pricingforprime
assets in top-tier markets, such as New York and Washington
D.C., has increased rapidly, and cap rates are back to pre-
crisis levels. This has reduced their relative attractiveness.
However, there are signifcant regional dierences, and
pricing or other segments o the market remains subdued.
Selected opportunities may appear as demand broadens rom
its current narrow ocus.
• Intheeurozone,capitalvaluesgenerallyremainexpensive
on a relative basis, and other regions potentially oer better
value. However, there are signifcant country level and local
variations within the region, and we expect stock specifc
opportunities to emerge.
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12
• Alongwithmostcommentators,wedonotbelievethe
resolution to the peripheral European countries’ fscal
difculties has been achieved. The end game is difcult to
predict and is likely to drag out over quite some time probably
with bouts o nervousness or the EUR ollowed by relie
rallies as seen recently.
• OurviewofthelikelypathofofcialUKinterestratesis
now dierent to the market. We believe the frst rise in
rates will be later than the market expects and possibly not
even until 2012 because o the underlying ragility o the UK
economy coupled with signifcant urther fscal tightening in
the pipeline.
• Wecontinuetorecommendneutralpositionsforthemajorcurrencies as we do not have a high conviction on their
direction over the orecasting time horizon.
Currency
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Sovereign
•Malaysia
A Malaysian government agency will sell RM10 billion
(US$3.3 billion) o sukuk to fnance the construction o police
quarters and acilities. Pembinaan BLT Sdn Bhd, which develops
acilities or the police, will issue the sukuk. Pembinaan BLT Sdn
Bhd, a construction company owned by Malaysia’s Ministry o
Finance, started marketing RM1 billion ($327 million) o sukuk.
The sukuk, which will be the frst under a 25-year, 10 billion
ringgit Islamic Medium Term Note program, are being oered
in six maturities. Proceeds rom sukuk sales will be used to
build police acilities and to pay debt obligation.
• Bahrain
The Central Bank o Bahrain (CBB) announced that the
monthly issue o the short-term Sukuk Al-Ijara has been
oversubscribed by 450%. Subscriptions worth BD45 million
were received or the BD10 million issue, which carries a
maturity o 182 days. The expected return on the issue, which
begins on 20 January 2011 and matures on 21 July 2011, is
0.92%. The Sukuk Al-Ijara are issued by the CBB on behal o
the Government o the Kingdom o Bahrain.
• Kazakhstan
Kazakhstan is set to pass legislation that would allow Kazakh
corporations to sell sukuks. The legislation is expected to bepassed within the next two months.
• Indonesia
Indonesia’s fnance ministry plans to sell 2.25 trillion rupiah
($248.62 million) o sukuk in February to the state-managed
Islamic Haj Fund via a private placement. The und is managed
by the religious ministry, and the sukuk is not tradable on the
secondary market.
Corporate
• UAE
Emaar Properties, the United Arab Emirates’ biggest developer
by market value, may sell a 5.5 year benchmark size dollar-
denominated sukuk.
•Saudi Arabia
Saudi Arabia’s civil aviation authority is eyeing sale o sukuk, in
several tranches to fnance a modernisation o the kingdom’s
airports. The frst tranche o the sukuk would be worth 4.5
billion riyals ($1.20 billion).
•Malaysia
Malaysia’s Sapuracrest Petroleum secured a RM750
million (US$244 million) Islamic fnancing acility to und its
expansion. Maybank Investment signed an agreement with
Sapuracrest unit or the acility that include Malaysian ringgit
and US dollar denominated tranches. The deal, which employs
the Ijarah and Murabahah concepts, attracted strong demand
with a total o six participating fnanciers.
Pengurusan Aset Air, or Water Asset Management Company
(WAMCO) is a wholly owned company under the Minister o
Finance, has sold RM2.7 billion o sukuk in January. It sold
RM1.2 billion in three-year paper at 3.64%, RM1 billion o
5-year paper at 3.92% and RM500 million in 10-year paper at
4.43%. The issuance was part o a RM20 billion government
guaranteed Islamic und-raising programme.
Sukuk Index
• TheHSBC/DIFXUSDollarSukukIndex(SKBI)isdesigned
as a replicable benchmark tracking the return o an emerging
Sukuk portolio. It consists o USD/ GBP/ JPY/ EUR-denominated fxed/ oating rate vanilla Sukuk. The SKBI
average yield stands at 4.882 as at end o January 2011
compared to 4.736 as at end o December 2010.
Sukuk
30/01/10
0
1
2
3
4
5
6
7
8
9
28/02/10
30/03/10
30/04/10
30/05/10
30/06/10
30/07/10
30/08/10
30/09/10
30/10/10
30/11/10
30/12/10
30/01/11
SKBI Average Yield
4.882
Source: Bloomberg as o end o January 2011
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