What is your investment outlook for Asia in 2018?
I am generally quite cautious on equity markets in 2018. Following strong returns over the last 18 months I think equities are looking quite expensive. We need to see significant earnings growth to justify higher valuations, but I am cautious as the global economic environment is not as favourable as many investors believe. There is also the potential for policy risk that could destabilise markets.
What do you think could most surprise investors next year?
A rally in oil prices and a strong US dollar. We’re experiencing a second straight year where oil industry capex has fallen, and there will possibly be a third - which would be unprecedented. The onset of electric vehicles over the coming decades means there is less incentive to develop an oil field or refinery because they’re likely to become increasingly obsolete. In the medium term, this could lead to tighter supply versus demand, which would be supportive for oil prices. Saudi Arabia and Russia have capacity to increase supply, but not enough to offset this structural supply side issue. The knock-on impact of higher oil prices is rising inflation which could prompt the Fed to raise rates faster than expected, providing support for the US dollar. I do not think many investors are positioned for this.
How do you plan to capture the best opportunities and add value for investors?
I manage a concentrated fund of 25-35 companies so stock selection remains the bedrock to the portfolio. If, as I expect, markets face a tougher period then robust balance sheets, strong and stable cash flow and supportive valuation should outperform. This also requires investing where others are not. With that view we’ve been increasing exposure to energy names. If rates do rise then the fund has property names that can benefit in such an environment. The fund is also exposed to gold which has the ability to outperform, even if equity markets rally. I’m also finding interesting ideas in the China A-share market as it remains under-researched and its breadth means there are pockets of opportunity.
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