Volatile markets expected to yield growth in 2012: HSBC


CAIRO: As volatility gives way to long-term investment opportunities, a report by HSBC said Egypt’s economy will show “positive growth” in 2012 after last year’s slowdown.

HSBC’s Global Asset Management Outlook for 2012 also shows the bank’s optimism regarding emerging markets.
Despite a turbulent year for the global economy with the Euro zone crisis as well as the aftermath of the Arab uprisings, HSBC predicts last year’s volatility to turn into long-term rewards for 2012.
“The fundamentals of the Egyptian market are strong with a favorable demographic profile, a diversified economy and a strategic geographic location,” Yaser Gamali, head of HSBC Global Banking and Markets, told Daily News Egypt.
”HSBC Bank Egypt expects to see growth strengthen in 2012,” he added. “At the same time, delivery of the various regional and international aid pledges to Egypt, such as IMF funding, should reduce the government's fiscal deficit.”
Finance Minister Mumtaz Al-Saeed said Egypt would maintain its budget deficit at LE 134 billion (8.6 percent of gross domestic product) in the financial year ending June 2012, down from an expected 11 percent of GDP after several austerity measures were introduced.
Egypt plans to raise natural gas and electricity prices paid by heavy industries by 33 percent this month to help cap the deficit and may soon renegotiate a $3 billion IMF facility it initially rejected in June last year.
“Enhanced financing would also help support the currency, although a weaker currency could help Egyptian industry and tourism competitiveness,” he said.
In the bank’s global outlook for 2012, HSBC Global Asset Management argued that “short-term sentiment has driven markets at the expense of long-term investment thinking.”
In turn, this has created what is believed to be a “potentially attractive set” of investment prospects for this year with a longer-term outlook.
“In its global outlook for 2012, HSBC Global Asset Management argues that frequent rotations in sentiment in markets reflect the fact that officials have been applying a ‘sticking plaster’ approach to addressing fundamental problems — acting only when faced with severe market pressure, and only then delivering just enough to stem the tide in the short run,” HSBC said in a statement.
“Investors are therefore presently focused on whether European policymakers will be able to deliver a comprehensive long term solution to deal with the Euro zone crisis.”
As a result of volatile markets, investors have sought “safe havens” in 2011, such as gold.
According to the report, this pushed gold prices to record new highs as government bond yields witnessed “the lowest levels for a generation.” Moreover, this put some government bonds in a place where returns are negative when inflation is taken into account.
“Economic growth is likely to remain under pressure in 2012; although many European companies have robust finances, a lack of confidence has simply deterred them from investing,” Alec Letchfield, Chief Investment Officer at HSBC Global Asset Management in the United Kingdom, said in the statement.
On this basis, the report stated that for 2012, equities offer the best value even though short-term performance is likely to remain unpredictable.
“However, we believe that this ignores two key positive factors which point to a brighter long-term future for investors: firstly, many firms based in the Western world are increasingly benefiting from profits in emerging markets and, secondly, while the macro outlook for developed markets may continue to be a drag, emerging market equities look set to benefit from a much more supportive economic environment in the region,” he explained.
This year, however, with the industrialization of emerging markets combined with inflation, physical assets like property commodities will be favored.
Letch pointed out that as global emerging markets maintain growth, there will be more spending on domestic infrastructure. This will lead to personal wealth, thus leading to higher levels of domestic consumption.
Gamali pointed out that this year, Egypt will be among the emerging markets with higher levels of consumption as the country’s political situation becomes more lucid.
“As political transition continues to move forward and security improves, sentiment will become more positive and private sector investment should return,” he said. “HSBC expects not only a pick-up in foreign investment in 2012, but also domestic consumption should progressively pick up, after having been put on hold last year.”
Letch, on the other hand, pointed out that such “positive” trends are expected to decrease the long-standing dependence of emerging markets on exports, making them “guardians of their own destiny” or more reliant on their own resources, according to the report.
“Such powerful drivers, coupled with factors such as industrialization and urbanization as well as more robust fiscal positions than the West, underpin our longer term positive views on emerging market equities; we continue to see stronger growth from the region in 2012 in comparison with developed markets, albeit that the rate of growth may slow somewhat when compared with recent history,” he added.
When it comes to Eastern European countries, the bank also had a positive outlook.
“We favor Russian equities, where we see supportive fundamentals while equity valuations are also low versus their historic average, although political risk remains a source of market volatility,” Letch said in the statement.
Equities are also expected to perform well in Latin America, showing that at the macro-level, many Latin American countries are in better shape than “developed market peers, with higher levels of consumer confidence and solid fiscal accounts.”
The markets of Asian countries, on the other hand, which are “export-heavy,” are also viewed positively in 2012, despite the effects of the global slowdown in 2011.
“Within Asia, HSBC Global Asset Management favors Chinese equities where in its view valuations are currently attractive; the market is currently trading on about eight times 2012 earnings,” the statement said. “Rapid rises in residential real estate prices could reverse and become destabilizing to parts of the economy but it believes that a soft landing is the most likely outcome.”