March 2019

Talking heads: The investment view from Asia

Osaka-Shi_JapanLooking ahead to the rest of the year, investors in Asia share their views on risks and opportunities in Indonesia, Vietnam, India and Japan.
JEAN-CHARLES SAMBOR, DEPUTY HEAD OF EMERGING MARKET DEBT, BNP PARIBAS ASSET MANAGEMENT What is your investment outlook for 2019 after a year of global headwinds?
We think the risks for the asset class have been overestimated. 2018 was a challenging year for markets, but we expect macro conditions to recover in 2019. A dovish US Federal Reserve (Fed), improving US-China relations combined with a stable macro story in emerging markets should all be positive for emerging markets fixed income. The asset class has very good technical, as most investors are underweight on emerging markets in their fixed income portfolios. We are both positive in hard currency and local but we also expect local debt to outperform. However, one should be conscious that it will be a volatile year. The recent rally has been very strong and we expect quite high volatility and dispersion across markets, which should create opportunities in terms of alpha creation. 2019 will be a positive year for emerging markets, albeit it a volatile one. What are your top three investment/asset allocation concerns?
Our main concern is the market becoming too complacent after a Fed dovish statement. At some point we may see a more hawkish stance from the Fed, which could take the market by surprise. Additionally, while we have always been positive during US-China trade tensions, the market seems to be taking this improvement as a given, which could be a somewhat tricky situation as well. In addition to this, there are still some idiosyncratic risks which could spook markets. We do not see any tangible improvement in Turkey despite the recent rally, the risk of sanctions on Russia is still possible and there are still some frontier markets which are still at risk of default. Given Indonesia’s sensitivity to US interest rates, do you think it will benefit from the change in the interest rate environment globally?
We are still positive on Indonesia. The overall macro fundamentals are strong, fiscal deficit is really under control and public debt has come down significantly. The current account deficit has increased a bit recently but we see this as temporary. It is true that Indonesia’s local markets are very sensitive to the global risk appetite and Fed policy given the high share of foreign ownership. However, with a more dovish Fed and more stable investor base, we are positive on Indonesia’s local markets. We see hard currency sovereign debt as fairly priced. It is tight, reflecting good creditworthiness. Overall, we also like Indonesia corporates selectively. Is Indonesia even more attractive to investors amid US-China trade tensions? If so, which sectors in particular present the best opportunities?
Not necessarily, as tensions are coming down, but if they were to flare up again, it would be negative for the entire region. I do not see Indonesia benefiting from tensions. Maybe in the long term it could have some positive impact, if we see some manufacturing relocation away from China into Southeast Asia. However, given the nature of Indonesia’s economic stance, we would expect less of a negative impact on trade and overall economic growth. The indirect impact would be through commodities prices. A weaker China would have a negative impact on commodities prices. Again, this is not our central scenario but a risk scenario we closely monitor.
BILL STOOPS, CHIEF INVESTMENT OFFICER, DRAGON CAPITAL What is your investment outlook for 2019 after a year of global headwinds?
Vietnam’s economy is in good shape on its own merits, with minimal inflation, a stable currency, external account surpluses, high FX reserves, low foreign debt, competitive exports and so on. So it is more a question of what happens externally. We endorse the view that Vietnam could be a beneficiary of the US-China trade war, and Fed rate hikes seem unlikely to be an issue. A slowdown in global trade could initially dampen growth through the export link, but perhaps only moderately, because the domestic economy is very strong, and meanwhile, FDI [foreign direct investment] continues to flow. We see GDP growth of 6.5% and the market hovering around 900-950. What are your top three investment/asset allocation concerns?
  • Finding sufficient liquidity in companies we want to buy or sell, for the size of funds we manage – $3 billion, which is quite sizeable for the local market.
  • Minimising the premiums we pay for stocks which have reached their foreign limit.
  • How soon stocks we like on fundamental grounds may take to be appreciated in a market that still has its fair share of insider manipulation, speculation and day trading, but definitely does recognise quality stocks over time.
Is Vietnam poised to benefit from the US-China trade war and if so, which sectors in particular?
In lower-end manufacturing, Vietnam has been getting steadily more competitive than China based on sheer economics, as wage differentials expand. Trade wars will just be another cost pressure, but one that greatly accelerates matters. It will take a while for more production capacity to be relocated to Vietnam, but significant new export orders have already started flowing to the seafood, garment and furniture industries as business is diverted from China. This is a harbinger of things to come. And it will enable items that seem vulnerable (like cellphones) to be more easily replaced by others (like consumer electronics) as foreign direct investors change their mix. Vietnam will continue to move up the value chain all the time. In January 2019, you said that investors can expect further corporate reforms in the second and third quarters of 2019. Which ones will investors be keeping a close eye on?
We are hoping to see enough progress on rationalising the system of foreign ownership limits, that MSCI classifies Vietnam as an emerging market. Towards the end of 2018, we thought the process was speeding up significantly, giving Vietnam very high odds for being watchlisted by June 2019, or June 2020 at the latest, with inclusion following in a year, hence our comments at the time. But the process now looks to remain gradual. We expect the government to keep implementing periodic small reforms such that, step by step, Vietnam has better than even odds to be watchlisted in June 2020, and we will see what happens next.
ANISH MATHEW, CHIEF INVESTMENT OFFICER, SUNDARAM ASSET MANAGEMENT What is your investment outlook for 2019 after a year of global headwinds?
The first half of the year is likely to be a continuation of the market consolidation that started last year as investors factor in potentially lower earnings due to slowing global growth. The second half should be a decent period for global equities as we expect global growth to stabilise by then and monetary policy to be supportive. For India too, we expect the first half to be a quiet period for the market as investors are likely to remain on the sidelines awaiting the outcome of the general elections, which will be held in the second quarter of 2019. Following the elections, we expect the Indian market to rebound as the event risk is finally extinguished and investors start to focus once again on the fundamentals. What are your top three investment/asset allocation concerns as India, the world’s largest democracy, prepares to head to the polls in 2019?
  • A slowdown in government capex as resources get diverted elsewhere;
  • Private capex continuing to remain negligible as corporates remain on the sidelines; and
  • Populist measures to pump-prime the economy ahead of the elections, causing fiscal deficit to widen.
What are your investment expectations for India amid a backdrop of weak growth and political uncertainty in the first half of 2019, followed by elections and the effects of lower commodity prices?
Historically Indian equity markets have always done well in the months that follow the general elections. For example in 2004, the Indian market fell by double digits on the result as investors were disappointed that the then ruling party, the BJP, failed to get re-elected. However, by the end of six months following the result, the Indian market had bounced back and gained some 35% in INR terms. We expect this year to be no different as investors who are on the sidelines, particularly foreign investors who have been net sellers of Indian equities since the beginning of last year, come back into the market once the elections are out of the way. Are you planning any product launches in Asia in 2019?
We are looking to launch a concentrated ‘best ideas’ India equities fund in the second quarter of 2019. This fund will be market cap-agnostic and will take advantage of the extensive research done by our research analysts who are based on the ground in India. From our alternatives stable, we plan to launch our second private credit fund, which will focus on lending to real estate developers in South India, where the Sundaram Finance Group is headquartered.
PETER JENKINS, INVESTMENT SPECIALIST – ASIAN EQUITIES, NOMURA ASSET MANAGEMENT What is your investment outlook for 2019 after a year of global headwinds?
In the immediate future, we expect the Japanese stock market to recover from its 2018 lows on the basis of its stable to positive corporate earnings picture, combined with valuations that have sunk to historic low levels. However, investor sentiment remains fragile and the medium-term outlook for the market is very much hostage to global events. The longer-term picture for Japanese equities remains bright, driven by the progression in corporate earnings and helped by the growing emphasis on improving shareholder returns. We expect the improving trend in corporate returns to remain a major investment theme in Japan for years to come. What are your top three investment/asset allocation concerns?
Within Japanese equities our major concerns are:
  • A rapid strengthening of the yen, which often functions as a safe haven in times of investor risk aversion, squeezes corporate profitability and suppresses inflation.
  • A further escalation in trade disputes – between the US and Japan directly (e.g. import tariffs on Japanese cars) or between the US and China.
  • A significant shake-out in the technology sector, where Japanese companies are well represented.
Is Japan poised to benefit from the US-China trade war and if so, which sectors in particular?
In all scenarios, on an aggregate level, Japan will be impacted negatively from any further escalation in the US-China trade war. The key question is the degree of disruption to specific industries and stocks under various scenarios. Japan needs to keep an eye on the consequences of the trade war on its auto industry. Although most of the US deficit is from China, most of the deficit from Japan is related to automobiles. Despite this, attractive opportunities still do exist in Japan, if one is selective. There are Japanese automakers that are relatively insulated from the trade wars and able to capture the long-term growth of emerging markets. Do you think concerns around global growth will increase demand for Japanese bond futures?
Our global fixed income team believes that concerns over global growth are overstated. Although we have seen a slowdown in Europe, the US is still strong, with record low employment and some wage inflation. Monetary policy has tightened but remains accommodative. Meanwhile, impacted by the stronger US dollar and the US-China trade dispute, growth in Asia has slowed. Any hint of a resolution to this dispute would likely support markets and the economy alike. So, whilst the yen and Japanese government bonds (JGBs) are viewed as safe havens, we think it unlikely in the short term that demand for JGB futures will increase. ©2019 funds global asia

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