Three key takeaways:
1. We expect 2019 to be a challenging year for equities, with the key for the Asian region being how China addresses its structural risks.
2. The US back-tracking on its Quantitative Tightening program and cutting interest rates could surprise markets.
3. We remain focused on companies with strong balance sheets and resilient demand, as these should see relatively better earnings than those more cyclical parts of the market.
Three questions:
1. What is your investment outlook for Asian equities in 2019?
I think 2019 will be a challenging year for equities, as some of the excesses from the past decade come to a halt.
Many investors point towards increasingly cheaper valuations, however I don’t see a huge amount of value, given earnings revisions are likely to trend down as global economic growth remains muted.
China is the key for the Asian region, as it faces increasing structural risks, such as addressing excessive debt, which are unlikely to be resolved without having an impact on external financial markets. Quantitative Tightening (QT) and deleveraging policies globally should mean a continued tightening of liquidity, which is likely to increase volatility.
Investors will need to be very selective about the companies in which they invest, with an extra focus on companies with strong balance sheets being necessary to weather this storm.
2. What do you think could most surprise investors next year?
Two things come to mind.
First, some large ‘stimulus’ from China that it can ill afford, whether it’s infrastructure-led, or personal consumption-led via tax cuts or subsidies. Second, the US Federal Reserve begins cutting rates as it back-tracks on its Quantitative Tightening.
Either of these is possible should markets fall materially. If this occurs, we will look to deploy some of the portfolio’s cash into existing or new ideas.
3. How do you plan to capture the best opportunities?
With tougher markets and heightened volatility ahead, the portfolio remains conservatively positioned, however we are ready to act on opportunities as they arise, such as our recent buying of selective China A-shares.
The China A-share market was one of the worst performing regional markets in 2018, with an indiscriminate sell-off across almost the entire market providing some interesting stock-specific investment ideas.
I remain focused on companies with strong balance sheets and resilient demand, as these should see relatively better earnings than some of the more cyclical parts of the market. Most of the portfolio’s India holdings have been sold, however we’ll be ready to buy back into this market should valuations become more attractive.
With tougher markets and heightened volatility ahead, the portfolio remains conservatively positioned, however we are ready to act on opportunities as they arise, such as our recent buying of selective China A-shares.
