The Prudential Prediction: Overweights and Underweights

Like the photo above, you could be yawning at the stock-market scenario in 2010. You could also likely experience a roller-coaster ride this year. This is premised on the belief that Asian stock markets, after a rally in 2009, will ride 'the tiger' of the new headwinds expected in the US mortgage sector, Prudential Fund Management Services opined today.

While there is a V-shaped recovery in Asia, markets may have been overly optimistic about a US recovery, said Robert Rountree, the head of investment marketing of Prudential Fund Management Services in Singapore.

“We are not out of the debt crisis. The Americans have got a lot of mortgage hurdles in front of them and that will become apparent this year,” he averred.

US banks have seen delinquent loans growing rapidly on their books but the amount of loans that they have written off have been lagging behind quite significantly, he said.

“2010 is going to be a year when the American banks are going to come under pressure again. As these things start to unfold, you could well see a kneejerk reaction in Asian markets,” said Rountree.

Rountree said he is confident that Asia, with its strong reserves position and a robust banking system, to again emerge relatively unscathed.

“We are going to see another shift to the de-linking of the Asian stock markets and the Asian economies” from the developed world, he said.

“The long-term story of Asia will remain intact, any selloffs are buying opportunities,” he said.

In Asia, Prudential is overweight on China, India, Philippines and Thailand. The fund management firm is underweight on Malaysia and Hong Kong.[How sad!]

India is “expensive on current profit forecasts; but forecast earnings for 2010-2012 will likely surprise on the upside,” said Rountree.

For China, although valuations are no longer a bargain, “it is too early to sell,” he said.

Although the outlook for Malaysian equities does not look fantastic, Malaysian corporate bonds may shine after a lacklustre 2009, said Bernice Leaw, head of investment services at Prudential Fund Management Malaysia.

Malaysia’s corporate bonds may attract more interest than government bonds in 2010, helped by “favourable supply /demand dynamic,” said Leaw.

“Corporate bonds would tend to perform well over the mid-to-longer term as companies’ financial standing improves along with the economy,” she said.

Investors’ risk appetite has improved as the economy recovers and the government’s efforts to rein in budget deficits will lead to fewer government bond issuances.

As a result, government bond yields are expected to stay “range-bound on a weak bias,” she said.