HONG KONG, Oct 18: Security fears are stiffening risk premiums in Asia, and the flow of funds back to the US and Europe would accelerate if events in Afghanistan spread to nearby countries, a fund management strategist said on Thursday.
“We’ve already started to see in the last month or so that investors have been taking money out of emerging markets and putting it back into the United States and Europe,” said Andrew Milligan, head of global strategy at Standard Life Investments, which has $120 billion of assets under management.
“If the risk premium rises, because of events in Afghanistan spilling into India, Pakistan, Kashmir or into some of the countries across this region, that flow will accelerate,” the Edinburgh-based strategist said.
Evidence of such shifts is seen in rising US and European stocks, with the Dow Jones Industrial Average up 12 per cent and London’s FTSE Index adding 15 per cent from their post-September 11 lows.
Asian equity markets have underperformed, adding 8.2 per cent on average during the period.
Political risks are seen as the biggest concern for Asia.
“Most people are assuming that the situation in Afghanistan is broadly well contained, but there’s so many other possibilities,” added Milligan, who is neutral on Asia but overweight on US and Europe.
Despite seeing long-term value in equities, Milligan said investors should steer clear of high-yielding debt in Asia.
High yield bonds are those issued by corporates or sovereigns which do not qualify for investment grade ratings. Philippines sovereign and corporate bonds form a large part of Asia’s high yield universe, for instance.
“It’s a dangerous situation for people to have high-yield debt at this point in time. They need to control their credit quality extremely carefully,” he said.
“The better grade debt is certainly something people should be focusing on for the next few months or so,” he said.
Expansionary fiscal policies — whether to boost economic activity to relieve the debt burdens of ailing companies or to spur growth — and low interest rates have added to credit risks in Asia.
“The difficulties of rolling over short-term debt can be quite considerable,” Milligan said.
Attracted by lower short-term interest rates, many Asian companies have resorted to accessing short-term debt. But they could face significant risks of having to seek refinancing when interest rates go up in coming years.
“The debt maturity of companies is just as important as the overall debt burden,” he said.
Milligan said the effects of expansionary fiscal and easy monetary policies should be felt in late 2002 or 2003, which will benefit industrial and consumer cyclical stocks in the region.
“Some of the industrial and consumer cyclical are the ones people should be looking for,” he said. “They are much more attractive on a relative valuation basis than some of the expensive defensives.”
In terms of markets, Hong Kong and Australia stood out for their high dividend yields.
But technology stocks continued to be out of favour as the industry is still stuck with excess capacity.—Reuters