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Drop Cyclicals, Buy Defensive Plays: Analysts

Wednesday, 13 Jul 2011 | 9:11 PM ET

Asian markets rallied on Wednesday on China’s better-than-expected GDP numbers reassuring investors that the world’s second-largest economy was not headed for a hard landing, but a number of strategists and fund managers are still preferring to play it safe, shunning cyclical stocks for defensive plays.

Pedestrians walk past a branch of the Industrial and Commercial Bank of China (ICBC) in central Beijing.
Teh Eng Koon |AFP | Getty Images
Pedestrians walk past a branch of the Industrial and Commercial Bank of China (ICBC) in central Beijing.

Blame it on the uncertain global environment.

“There are so many big imponderables in markets out there. We’re not entirely sure of the trajectory in the U.S., Europe is a big concern, and we’re worried about the type of lending that China is going to engineer. I think in this context, it makes sense for investors to adopt a slightly more defensive posture,” says John Woods, Chief Investment Officer of Citi Private Bank.

Good Yield Hunting

Woods recommends investors put their money in North Asian markets, which are cheaper and more liquid than their smaller Asian counterparts. He has consumer staples and utility plays as his top picks.

This is not the time to be brave says, Enzio von Pfeil, CEO of Commercial Economics Asia. He advises investors to conserve their cash or put their money in high yield stocks.

Hong Kong listed utility plays typically pay dividends between 3 and 4 percent. For example, China Mobile’s one-year forward dividend is about 4.3 percent, while CLP Holdings and Power Assets offer a yield of 3.7 and 3.9 percent respectively.

“The dividend has to be high, but it has to be sustainable. And of course, we also like gold and Swiss francs. They are not particularly exciting, they don’t yield a great deal but they are able to keep the money in the pot as opposed to dissipating it,” von Pfeil adds.

Bank Dividend Plays

Simon Grose-Hodge, Head of Investment Advisory at LGT Bank Singapore also has high dividend stocks and cash rich companies on the top of his buy list.

Despite concerns about exposure to local government debt, he believes that Chinese banks look attractive at current levels, trading at forward price to earning ratios of about 6 to 12 times.

“With banks trading at these levels, a lot of the risks are already priced in. The amount of bad debts they are likely to have is a fraction of the GDP, not a multiple of GDP, so that’s not something to be overly concerned about,” says Grose-Hodge.

Chinese banks are also high yield plays; ICBC , China Construction Bank and Bank of China for instance, offer dividend of between 4 and 5 percent.

“Interest rates are likely to stay low for a lot longer, and in this environment, dividend yield becomes much more important in terms of making income,” he adds

What is the Tipping Point?

So what’s the tipping point to get back into cyclicals and abandon the defensive stocks?
Woods of Citi Private Bank says capital inflow is key. “Until the flow starts to come back to Asia, we’re going to be relatively defensive. We’ll turn a lot more positive when we see fresh money coming in rather than rotational play around the region.”

Market strategists are also watching inflation data very closely, waiting for signs that Asian central banks are more comfortable switching to a neutral bias in terms of monetary policy.

Only at that point will Asia be seen again as more of a growth story than an inflation risk, say analysts.

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