Scandinavian and Asian equity markets including Korea, Taiwan, Singapore and Hong Kong are best placed to benefit the medium-term investor in the next five to 10 years, according to a study by Baring Asset Management in London.
‘Strategic Perspectives 2010’ also reports significant differences in potential across the Euro-zone while ranking Germany, France, the UK and the US equally with Japan’s prospects lagging.
The report takes a medium-term view and assesses each market according to Baring’s core beliefs about growth potential, valuation and liquidity. Each criterion is given equal weighting and individual scores, ranging between plus and minus two, are combined to give an overall ranking.
Under this system, Switzerland records the highest score (and therefore highest ranking) with a total of 16 out of a potential 22, followed by the Netherlands on 15. Taiwan and Korea score 10 while Singapore scores 8 and Hong Kong, 6. The Scandinavian countries Norway, Denmark and Sweden and Ireland and Canada all fair well with the report classifying them as aggressively overweight.
In contrast, Jordan and Pakistan manage scores of –12 and –18 respectively earning them a ranking of aggressively underweight. Others joining them include Russia, Greece, Poland and Brazil.
France and Finland score six points with Germany, the US and UK on five, earning them all an overweight rating. Japan turns in a score of four and shares a neutral rating with, among others, Austria, Malaysia, Mexico, Chile and Hungary.
The report is set in the medium term as Michael Hughes, the report’s author, says: “asset allocation decisions are best framed in the context of years rather than months. This view is supported by academic research, which suggests that for periods of three years or more, what happens to economies is the major determinant of what happens to markets.”
Over this period the Euro-zone countries have very different prospects. Greece is already a member of the EU but only manages a score of –10 and an aggressive underweight rating whereas Hungary, an EU aspirant, manages a neutral rating and Ireland scores aggressively overweight.
Hughes says that as there are five growth criteria (opposed to three valuation and two liquidity factors), the scores have a bias in favour of growth. “This is a direct reflection of the core beliefs that envisage a new period of economic prosperity bringing rising growth rates,” he says.
The five growth beliefs include predictions world living standards will improve faster than in the last 25 years and the impact of globalisation on pricing, capital flows and government will increase, as will defence spending.
As regards liquidity and valuation, Barings believes economic growth will be financed by capital markets rather than banking systems, the next 10 years will produce a bear market, real bond yields will remain below the average of the past 20 years and inflation will remain subdued.
The rankings refer to equity markets alone but Hughes points out this isn’t at the expense of bonds: “Arguably, there has never been a better time for including bonds is a medium risk portfolio.”