Bank of America Merrill Lynch was still enjoying its first year in first place on Institutional Investor’s All-Asia Research Team in March 2012, when Stephen Haggerty was named head of research for the Asia-Pacific region. More than a few market observers wondered if Haggerty, who had been directing equity coverage of the Americas, would be able to keep the firm on top.
The answer is irrefutably yes. This year BofA Merrill is not only No. 1 on the All-Asia Research Team for a fourth consecutive year, but also leads every one of that survey’s affiliated rankings: the All-Asia Sales Team, the All-Asia Trading Team and Asia’s Top Corporate Access Providers. It is the first firm to top all four of these rosters in a single year.
Haggerty, who earned a graduate degree in economics from Indiana University, worked as an autos analyst at Schroder Securities in London before moving to Merrill Lynch in 1999 to report on the sector. Five years later he was named deputy director of Americas research, then became head of Latin American company coverage before taking charge of Americas equity research.
The past 12 months have hardly been an ideal time for research directors in emerging markets, with words like “rout” and “bloodbath” often used to describe investors’ reactions to fears of a hard landing in China and uncertainties surrounding the U.S. Federal Reserve’s plans to scale back its program of quantitative easing. Markets have since calmed down, but Haggerty warns that more volatility lies ahead. II Director of Research Thomas W. Johnson asked the Hong Kong–based director to describe what investors should expect for the remainder of the year.
Last year investors pulled out of emerging markets, but in recent months they have been returning. Will they stay this time?
We remain skeptical about emerging markets. Our regional equity strategy team started the year in the minority by looking for flat to negative absolute returns in emerging markets, and year to date they have done just that.
We see several challenges this year: a potential reversal of the carry trade that fueled the strength in property, a drop in liquidity as the Fed continues to taper, a slowdown in China with heightened probabilities of liquidation and defaults, a deflating boom among stocks that are expensive and have high growth momentum, geopolitical constraints and a narrowing U.S. current-account deficit. However, we recognize that there are likely to be tradable buying opportunities for nimble investors.
In late April the U.S. reported disappointing real gross domestic product numbers for the first quarter. What is the likely impact on Asian stocks if the U.S. economic recovery is seen as faltering?
We think the GDP number for the first quarter was impacted by severe weather in the U.S. We expect growth to resume in the second half, and our full-year forecast is for growth of 2.5 percent, versus the 0.1 percent in the first quarter.
However, if the U.S. does in fact slow, this could lead to a delay in tapering, which is positive for emerging markets and Asia assets, specifically high-growth companies in gaming, Internet and health care. Slow growth and easy liquidity — the norm for the past five years — have been good for asset prices, especially in emerging markets.
Recently the International Monetary Fund raised its 2014 GDP forecast for China, to 7.5 percent, but warned of the rising risks associated with the nation’s shadow-banking system. Is Beijing doing enough to slow the growth of credit, or is a financial crisis unavoidable at this point?
Beijing needs to do more to address the shadow-banking issue by introducing new regulations, but we see no need to slow credit growth further, since it has already been dropping over the past year. Instead, Beijing could look to improve the mechanism and structure of credit growth to make it more efficient in allocating precious capital while avoiding systemic risks.
What is your forecast for the remainder of the year?
Our strategy is to overweight Australia and Taiwan and underweight Malaysia, Thailand and the Philippines. We remain neutral on the rest of Asia-Pacific.
We like Australia as the policy there is helpful via weak currency and lower short-term interest rates. Free liquidity is strong, and the current account is improving. Australia is possibly the best proxy for developed markets in the region. To us the market doesn’t look expensive. Also, we think profit margins are going to improve as [consumer price index] less unit labor cost — a margin proxy for companies — is looking positive.
We like Taiwan because of its low financial vulnerability and excellent macro — no lending booms, excellent external accounts, no external debt issues — and technology stocks appear attractive to us.
We are neutral on China as we see several immediate and long-term concerns. One, we think the property markets are elevated and subject to downside pressure from higher interest rates. Two, the working-age population has already peaked. Three, a growth slowdown; and four, China is likely to surprise negatively on earnings.
While we are neutral on India, we see upside risk to our view as growth optionality exists due to the high probability of a new government coming in. In addition, the current-account balance is improving, the currency remains competitive, [Reserve Bank of India governor] Raghuram Rajan is focused on reforms, and unlike China the demographics remain positive for India.
Have client expectations about research changed over the past year? Do you anticipate any changes in the year ahead?
Corporate access — road shows, company and facility visits, and conferences — is becoming an increasingly important facet of research content in general, and specifically in the area of strategic access, where the meeting or tour is tied very closely to an investable idea. Investors are focused on customized corporate access that provides better insight into a sector or company’s key drivers and unique access that provides real investment insights.
