Stock market investors should be overweight in Pakistan, where election-related uncertainty has overshadowed the country's attractive prospects, a strategist with State Street Global Advisors said on Monday.
The world's largest institutional money manager also thinks that investors should also be overweight cash and underweight stocks and bonds, given the risks of higher inflation and slowing US economy, said Lochiel Crafter, the firm's Asia-Pacific market and investment strategist.
The Singapore-based fund executive said despite fears of violence ahead of Pakistan's general election, it was the firm's third favourite emerging market stock bet after Turkey and Hungary.
State Street Global Advisors is the $2 trillion money management unit of State Street Corp. "We like Pakistan. It rates very highly on our models, overall. It's reasonable value. Our sentiment factor is quite strong and the macro outlook is strong," he told Reuters in an interview.
"(The election) adds risk, but it could also add a buying opportunity if the fundamentals stay strong." Financial markets were closed in Pakistan on Monday with military troops and police on watch over a vote that could return a parliament set on driving President Pervez Musharraf from office.
Crafter, who declined to name State Street's individual stock or bond holdings, said that the firm's other favourite markets in emerging Asia included Indonesia and Thailand.
In both cases, State Street's quantitative models showed their stock markets had healthy momentum. The firm's least favourite market in emerging Asia was India, where a rise in the market to a record high in January had stretched valuations, he said. "It's easily the most overvalued on a relative basis that we have in Asia Pacific," he said.
STOCK, BOND OUTLOOK ROUGH: Boston-based State Street, which managed about $170 billion of assets sourced from the Asia-Pacific region at the end of last year, is favouring cash because it fears the weakening outlook for the global economy could hit first-quarter corporate profits."Our general view is that the first half of 2008 is going to be a bit rough," he told Reuters.
"At this stage, we're bracing the portfolios to make sure that we can weather the storm. It's (a case) of managing risk right now ... we're happy from a risk perspective to be a little conservative."
Bonds often serve as a safe haven when stock markets weaken. But Crafter said bond market yield curves were likely to steepen as inflation concerns were priced into longer-term bonds, hurting prices and driving up yields. In currency markets, the Australian fund executive said Asian currencies were likely to strengthen modestly against the US dollar in the coming year. "Asian economies will continue to grow; therefore, their currencies will continue to be attractive," he said.