Dubai Simona Paravani, London-based global investment strategist at HSBC Global Asset Management believes that estimates for 2010 corporate earnings growth remain rather optimistic, which under the current economic conditions is creating greater risk for negative surprises.
She is all for diversification of portfolios, favouring emerging market asset classes including equities, currencies, corporate bonds and commodities.
Paravani is responsible for multi-asset multi-manager solutions globally as well as the lead on the HSBC Global House Views initiative. On a recent visit to the UAE, Paravani explained to Gulf News her rationale on diversification and preference for Latin American markets.
Gulf News: What are the options for investors in the current environment of uncertainty across all leading economies and markets around the world?
Simona Paravani: If you look around in markets across the world there are signs of recovery. But the problem before us is that there is difficulty in defining how strong and sustainable the current recovery is. As long as there are question marks on sustainability of recovery we will continue to see high volatility in equity markets.
The average of analysts' earnings forecasts for the global markets is a very optimistic 35 per cent. The key risk with such a forecast is that if economic recovery is not strong as assumed, achieving that kind of number will be challenging.
Fixed income markets are also likely to face high volatility, given the kind of deficit problems and sovereign debt issues the government across the world are facing. These risks are here to stay for some time to come. What is important for investors under the current circumstances is to position their portfolios in such a way that mitigates risks.
If equity and debt will continue to face high volatility, in your opinion, how should an investor optimise his portfolio?
Diversification is my answer. Though it may sound boring, diversification is the number one means to mitigate volatility risks in the market place. Long-term investors should diversify their portfolios.
When you talk about diversification, are you talking about range asset classes or markets?
Diversification has several dimensions. A very important one is diversification at geographical levels. Under the current global market environment, it is absolutely important to build geographical diversification of assets we hold in our portfolios.
The second most important dimension relates to the type of assets one holds in the portfolio. Some of those asset classes we would like investors include in their portfolios are alternate asset class. These would include commodities, real estate, hedge funds and private equity.
In recent months there has been a big investor rush into commodities. When global commodity demand itself is a derivative of global economic growth, is there any logic in perceiving commodities as a hedge?
We are seeing commodities as one of the instruments of diversification, not as an absolute hedge against market risks. Diversification is not about picking just one asset class against another.
Short term trends some of the leading global currencies such as the dollar and pound are very deceptive given the underling fiscal deficits of these economies. Where should investors turn?
The structural issues facing some of the major currencies such as the euro, pound and dollar are very similar. If we look at the deficit levels there are several countries other than the US and the UK facing similar situations. In the medium term, restoring fiscal discipline is something which major developed markets have in common.
From a diversification point of view we are recommending investors to move away from developed market currencies. If we are taking a medium-to long-term view, we prefer investing in emerging market currencies because structurally that is where we see potential for appreciation is going to be.
Do you have the same opinion on emerging market equities and debts?
From a long term perspective it is important to have exposure to both developed and emerging market asset classes. As far as weighting of exposure to the emerging markets is concerned it all depends on the risk appetite. If the investor has appetite for risk we think the growth potential is certainly higher in the emerging markets.
Among the emerging markets Asia and Latin America are the most preferred lot. Between these two where do you see higher growth?
In emerging markets we see a preference for Latin America. First, it's valuations. Latin America is trading at a significant discount relative to emerging Asia. That discount is not really justified by market fundamentals. Emerging Asia is expected to grow at a faster pace than Latin America, but what we see in Latin America and especially Brazil is more potential for upside surprises on growth, driven by strong domestic demand.
The last and most intriguing element of our positive view on Latin America is the strong growth in Asia itself. Its strong growth is a key driver for commodity demand. And Latin American economies and equity markets are very strongly exposed to the commodity cycle. So Latin America, interestingly enough, becomes a way of playing the strong economic growth in Asia.
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