Principal Global Investors’ investment experts in Asia shared the economic issue they’re following most closely and how they’re managing portfolios in response:
Hong Kong focus
Binay Chandgothia, managing director & portfolio manager, Principal Portfolio Strategies
I’m paying a lot of attention to how tightening financial conditions affect risk appetite and market valuations.
Easier financial conditions induce risk-seeking behaviour, which unleashes a virtuous cycle of asset price gains. Tighter financial conditions from central bank rate increases should logically halt this cycle unless higher growth provides a strong and compelling offset to keep the risk-seeking behaviour intact.
While global growth remains strong at this stage, anything beyond immediate visibility is clouded by trade war concerns, which could hinder the free movement of goods.
That increased friction could stymie growth in a couple of ways. First, there is widespread uncertainty. For example, the Federal Reserve’s Beige Book for July reveals almost all districts reported tariff concerns. Secondly, a trade war could push inflation higher. This could happen not only via increased costs but also by reducing free competition. A reduction in competition tilts the scales somewhat in favour of producers versus consumers in countries that meet a decent part of their domestic demand through imports.
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On the other hand, countries with excess capacity could face deflationary headwinds if excess supply is diverted to local consumers. If we do get to the stage where a substantial chunk of global trade is tariffed, headline risk assets will see drawdowns at least until global central banks stop tightening monetary conditions or valuations have adjusted enough.
This transition could still present investment opportunities and as asset allocators, we continue to look for such pockets to enhance returns in our portfolios by staying dynamic.
Patrick Chang, chief investment officer, CIMB-Principal Asset Management Malaysia
Our team is watching the momentum of the Chinese economy and developments in U.S.-China trade, which have supply-chain repercussions for ASEAN economies.
While the momentum of China’s economic growth momentum may start to decelerate in the next few quarters, we believe the Chinese policymakers will have enough “financial arsenal” to ease this downturn via further cuts to the reserve requirement ratio or through tax cuts intended to benefit average consumers.
What’s harder to predict is the depth of this U.S.-China trade war. In a protracted trade conflict, business confidence and spending could be dampened by rising competition (increased tariffs) and lower growth, coupled with a breakdown in international norms of doing business.
For equities, a protracted trade war may lead to increased risk premiums in emerging market assets. Our base case is built on the idea that the U.S.-China trade restrictions are more of a negotiating tool on intellectual property protection, as opposed to just being punitive tariffs. Hence, any softening of the stance on the intellectual property rights should be seen as a positive step. Hopefully, levelheadedness will prevail in time.
ASEAN markets have corrected and they’re now at levels we find compelling. Valuations at 13.5x are clearly close to lows we’ve seen over the last 15 years. We believe positioning and sentiment remain too bearish. Hence, we are currently in the process of deploying cash to work in sectors we find attractive, such as tourism, consumer, financial, and infrastructure.
Bekxy Kuriakose, head of fixed income investments, Principal PNB Asset Management
The key global issue for India is oil price behaviour. India is the world’s third-largest oil consumer and meets about 80% of its oil needs through imports. Increases in crude oil prices will burden fiscal and current account deficits. Then, there are the consequent impacts on economic growth, inflation, monetary policy and interest rates, exchange rates, and portfolio flows.
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In the relatively conservative, blended funds, we have made some tactical defensive moves in terms of sector allocation. We have shifted toward large-cap stocks and relatively lower-beta stocks. In our pure equity funds, we are holding fast in view of a swift correction. That’s meant some short-term weakness, but we are staying invested for the long haul. We are much more bottom-up in these portfolios and believe our high-beta stock holdings would yield significant upside over the next two to three years.
In our fixed-income funds, given the above risks and with the Reserve Bank of India expected to hike key rates further, we are running short durations and higher cash levels.
Win Phromphaet, CFA, chief investment officer, CIMB-Principal Asset Management Thailand
For our investment team, the U.S. trade war is the main concern.
We believe President Trump is pushing hard for short-term political gains. However, the economic impacts will be longer term. This creates uncertainties.
There have been huge outflows from emerging market equities, driven by trade war uncertainties, stronger U.S. growth, and a stronger U.S. dollar. Foreign net sales in the Thai equity market are over US$6 billion since the beginning of 2018, making Thailand the second-largest in emerging Asia after Taiwan. We see this as an opportunity to increase our weight in Thai stocks.
We also see opportunities in Vietnam. Economic fundamentals are solid in Vietnam, but stock prices are down 25% to 30% from their peaks because of outflows. This presents a buying opportunity.
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