SET among attractive emerging market bourses, HSBC unit reports

Despite recent spikes, the Stock Exchange of Thailand is among the most attractive emerging equity markets, according to HSBC Global Asset Management.

China, Russia, Malaysia, Thailand, Turkey and Poland look cheap on a price-to-book basis relative to profitability, while Brazil, Mexico and South Africa look expensive on this basis, the company said in its latest investment quarterly. On a longer-term basis, part of the return from emerging-market investments will likely come from currency appreciation.

Among developed markets, Japan, the United States, Britain, Italy, the Netherlands and Australia look cheap on a price-to-book basis.

"In a low-yield world, where volatility is likely to continue, investors need to stay focused in their search for returns. Credit and equity selection will be a key determinant of returns," said Philip Poole, global head of macro and investment strategy.

"Global economic growth was constrained in 2012, and this will likely be the case in 2013. We expect interest rates in the key developed markets to stay ultra-low for at least two years and probably longer.

"In such a low-yield environment, core government bonds are not attractive, but we see specific opportunities in the equity and higher-yielding bond markets, especially in emerging markets, where growth is clearly stronger," he said.

Bill Maldonado, chief investment officer for Asia-Pacific and strategy chief investment officer for equities, said: "Despite a strong bounce for most markets in 2012, we believe that equities, followed by emerging-markets bonds especially in Asia, still offer compelling investment opportunities as part of a balanced portfolio. Investors should continue to focus on fundamentals, which is a key growth driver of Asian markets in 2013.

"In 2013, we expect the recovery in Asia to continue, supported by structural reforms by governments to sustain economic growth.

"In Asia, valuations have collapsed, but profitability has not, which suggests a fundamental opportunity for investors in equities, especially China and Korea."

In both emerging and developed markets, cyclical sectors such as industrials, energy and materials look to offer the best trade-off between valuation and profitability at this point, while defensive sectors such as consumer staples and healthcare look expensive.

In an Asian context, China and South Korea are at cheap valuations and backed by accommodative monetary policy, corporate profitability and proactive government initiatives that provide considerable support to the local economies.

HSBC believes that China's growth is set to moderate over the next decade as the economy matures, while inflation is likely to be structurally higher. HSBC also believes that China will achieve a "soft" landing with GDP growth of 8-8.5 per cent this year.

The South Korean economy has shown resilience in a volatile global environment thanks to a persistent current-account surplus and large foreign-currency reserves, strengthened banking and corporate balance sheets since the 1990s Asian financial crisis, diversified export products and markets, and overall predictable, effective and decisive policy-making. A sound fiscal position and low level of government debt also give policy flexibility.

However, that country still faces the challenge of an ageing population over the longer term, and the possibility of a regime collapse or military escalation in North Korea is also a political risk.

HSBC also holds a positive outlook for Asian local-currency bonds, as key indicators such as Asian bond spreads and debt issuance remain at healthy levels in the region and Asian currencies remain significantly undervalued versus those of developed markets.

Though corporate spreads have compressed, they still look attractive compared with government bonds currently offering very low yields. There are also specific opportunities in US and European high-yield bonds, as there are signs showing that lending conditions in these markets have stabilised.