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Julius Baer CIO pinpoints three key topics

11 Mar 2010

Van Anantha-Nageswaran, Bank Julius Baer's CIO, is advising clients to target Asian currency appreciation, agricultural commodities and Thai equities in 2010. He explains his thinking in an interview with

Swiss wealth manager Bank Julius Baer is singling out Asian currency appreciation as one of its key investment themes for clients this year.

In an interview in Hong Kong, Dr Van Anantha-Nageswaran, the firm’s chief investment officer, said now was the time to take a position on India’s rupee and China’s renminbi.

New Delhi has been mindful of defending exporters’ interests in the past two years, with India’s foreign exchange reserves shooting above US$280 billion at the end of 2009.

“When reserves rise it is a sign that there is management of the exchange rate,” Dr Van told “The rupee has a greater chance of going up [than the renminbi] because the [country’s] monetary management is more responsive to market signals.”

Dr Van expects India’s GDP growth rate to pick up to between 8% and 10% in the next two years, driving up corporate earnings and attracting greater capital inflow.

“From the perspective of economic growth, expanding exports and long-term undervaluation based on purchasing power parity, the rupee has a lot of power to appreciate,” Dr Van said.

The renminbi’s story is compelling too, given that Beijing has kept its spot exchange rate at Rmb6.83 to the US dollar since July 2008. It has prompted vociferous complaints from trading partners about the advantage this has conferred to Chinese exporters.

Despite a slowdown in the US economy, China achieved GDP growth of 8.7% in 2009 on the back of strong fiscal stimulus measures. But Dr Van believes China will become confident enough to allow its currency to appreciate, although when he is not quite certain.

“Even if growth rates are not sustained in the medium term at 9% to 10% but between 7% and 8%, we believe China will be making progress towards domestic demand,” he said.

“If that happens, the government will pick up the courage to revalue the exchange rate. It could happen in the next 36 months, but because we don’t know the timing, this is a good opportunity for investors to take a position and just sit on it.”

He sees the non-deliverable forward (NDF) market as the best way to target renminbi appreciation. NDFs feature a fixing date, at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated, and a settlement date, when payment of the difference is due.

Dr Van also highlights indirect plays such as taking a position in Taiwan dollars, Singapore dollars, Indian rupees or South Korean won and watching them appreciate against the renminbi.

Another conviction call that Julius Baer is making is on agricultural and soft commodities, which Dr Van notes did not go up in price last year on the back of a good harvest.

“They did not participate in the broad-based commodity price rally, which was driven by expectations of higher growth and by the abundant liquidity that we had,” he said.

“So we believe the pricing is good at the moment, because going forwards we are going to have problems with respect to harvest, production, volatility and weather patterns.”

He anticipates high single digit returns on average over the next five years, and says investors should apportion 3% and 5% of their portfolio to the asset class.

In terms of equities, Dr Van is enthusiastic about Thailand’s market from a top-down perspective. “Thailand has had extremely lousy headlines over the last two or three years.

“It is reasonable to make the assumption that the market has priced a lot of these bad headlines in. The valuations look quite attractive and the dividend yields are high, so there could be a modicum of stability returning.”

However, he concedes there are risks to this view, not least the prospect of further unrest among supporters of ousted former premier Thaksin Shinawatra.

Nevertheless, he is advising clients to enter Thailand and exit Indonesia, where prices have shot back to near bull-market peak. The Jakarta Composite Index closed at 2,670.21 on March 10 this year, not far adrift of the 2,830.26 it reached on January 9, 2008.

Further, Dr Van highlights the messy fall-out over the US$716 million bail-out of Century Bank in Indonesia as a potential headwind for the domestic stock market.

The government claimed the bail-out saved Indonesia's economy, but opposition parties said the decision was illegal and called for the heads of vice-president Boediono – the central bank governor at the time – and finance minister Sri Mulyani.

“If president [Susilo Bambang] Yudhoyono is forced to sacrifice them, I think that would be a huge psychological and sentimental set-back in Indonesia,” said Dr Van.

“We are not turning fundamentally bearish on that country. It’s a question of finding the right price to go back in. So our call is go into Thailand and exit Indonesia for the time being. That is the kind of switch we are recommending at the moment.”

Julius Baer also has a long-standing call on gold for the next three years. “I think at some stage every developed country in the world will be looking to have a weak currency to stimulate domestic demand.

“There could be quite a bit of tension over [accusations of] protectionism, with trade and exchange polemics increasing. And also in 2012 we have massive elections happening in Russia, China and the US.

“Given all this and the fact that we have quite a few unfinished issues from 2008, it is always good for investors to have a natural safe haven alternative.”

11 Mar 2010