Global equities look attractive amid risks in 2nd quarter

Global equities are investors’ core asset this year. They believe these can generate better returns. Since they surged in the first quarter, US and China/Hong Kong stocks are investors’ best picks for potential growth through the year. Investors must be aware, however, of risks in the current second quarter, particularly trading risks and event risks, detailed as follows.
Trading risks arise from positive expectations of the market, since lately the world economy has recovered somewhat as reflected in favourable world equity prices.
The Economic Surprise Index of the US increased by 30.2 points in March, outperforming market expectations of the first quarter. However, this number has now plummeted to 2.9 points (higher numbers show positive surprises).
If economic numbers are outpaced by market expectations, investors may become concerned and take profits. As a result, the stock markets will be highly volatile or on a decline.
The VIX Index, which represents one measure of the market’s expectations of stock-market volatility over the next 30-day period, is in a five-year abyss, so the market is reflecting very high confidence. The point is that investors need to be more careful in the short term.
Event risks have to do with unexpected events, namely:
1 A financial-institution crisis and property issues in China: This means that the Chinese government may tighten monetary and fiscal policies counter to market expectations that want more relaxed policies. In addition, a new round of tightening measures could exert stricter controls on who can buy homes and a 20-per-cent capital-gains tax on property transactions. Also, banks may raise down-payments and mortgage rates for second-home purchases. As a result, the stock markets in mainland China and Hong Kong were highly volatile in the first quarter, yet have been declining since early this year. Stock prices have already reflected concerns over the various measures. Even though the Hang Seng Index has increased above 23,000 points lately, it is still a lower-risk market than any other stock market for investment in the second quarter.
2 The recovery process in the European banking system has been affected by the sovereign debt crisis. Analysts expect that the European economy is likely to grow by 0.2 per cent this year, nearly flat growth that would affect lending by commercial banks and expose them to the risk of non-performing loans. Finally, the effect will prove a concern to financial markets and result in stock-market volatility.
3 General elections in Germany, to be held on September 22: Germany is the leading European economy, so to maintain its political popularity, its government must be concerned about measures to resolve the sovereign debt crisis in the European Union (EU). The election results will prove crucial to determining the direction of the EU economy. In short, if politics change polarity in that country, it will certainly affect the continuity of the policy for handling the crisis.
4 Negotiations to raise the US debt ceiling: In February, the US House of Representatives decided to delay the deadline of its debt ceiling to May 19. This issue may affect investors’ confidence, and the US government may face the risk of a credit-rating downgrade.
Although investments in global equities are risky and highly volatile, with the ongoing global economic recovery and high liquidity, positive impacts are seen in investment in global equities this year. We advise investors to follow market movements closely and adjust their portfolios to suit the circumstances.

L Fund Management Department of Asset Plus Fund Management contributed this article.