Global Horizon - Going for growth style in Asia:: Macquarie Research

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Global Horizon
Going for growth style in Asia
Event
 We update our equity risk premium forecasts for the US, Europe and
emerging markets, including results for Asia and Latin America. We also look
at the link between high/low values of the US risk premium and the
performance of the Russell 1000 Growth and Value indices.
Impact
 Growth tends to outperform when the risk premium is high, with median
12 month outperformance over value of 5%. This likely reflects the fact that
many apparently cheap stocks are caught by the “value trap” when the equity
risk premium is high.
 Value tends to work better when the risk premium is low, with median 12
month outperformance over growth of 3%. This likely reflects the fact that
growth stocks have the greatest momentum when the market is overvalued
and the risk premium is low, and these types of stocks have the furthest to fall
when prices inevitably mean revert.
 As a tactical asset allocation tool, history suggests equity allocations
should be increased as the risk premium rises, and that an effective way
to do this is to invest more in shares and with a growth bias.
 Looking across the world at equity risk premiums, the US is now at 5%,
Europe is at 7.3% and MSCI Emerging Markets is at 7.9%. Equity risk
premiums have increased across all three regions so far this month on the
back of the decline in 10 year bond yields in the US and Germany.
Outlook
 We continue to expect improved growth and valuations to drive a second half
rebound in equity markets. Our study of seasonality suggests there is likely to
be ongoing volatility over the coming months, which means the best buying is
likely to occur in August and September.
 For leverage to the second half bounce, we continue to favour emerging
markets, and Asia in particular. The equity risk premium in Asia is 1.4
standard deviations above the long-term average, and the forward 12 month
return from similar points in history is 35%.
 With the current US equity risk premium 0.5 standard deviations above
the long term average, history suggest equity allocations should have a
higher than normal weighting towards growth over value.
 For leverage to the second half bounce we have selected 10 favoured stocks
with a bias towards Asia, and a bias towards growth. These stocks are shown
in the table on the left, and each one is rated Outperform, and 7 of the 10 are
also high conviction Macquarie Marquee buy ideas.