“One of the concerns in the market globally is the fear that the dollar has been too strong. When the dollar weakens, this is generally supportive for Asian equity markets in general,” Pinkerton told FSA.
“The dollar has been appreciating because the US is the only country in the world that is positioned to hike interest rates, but what’s happening now is that a rate hike could threaten the US economic acceleration. So they basically put the brakes on and this is what has driven the decline in the pace of dollar appreciation,” he said.
The devaluation of the RMB is another risk to Asian currencies, but Pinkerton believes a dramatic depreciation is unlikely.
While there are natural pressures on the currency to depreciate, China’s central bank has made it clear that its primary objective is to maintain currency stability, he said.
“It would be the easiest thing for China to pursue a more dramatic currency depreciation and that would then have a contagion risk to other trading partners in the region. It is against China’s long-term interest to basically introduce more volatility to its currency because it [is now] part of the world’s reserve currency basket,” he said.
Currency as market catalyst
Pinkerton has become more bullish on Asian equity markets, in particular Malaysia, Indonesia and Vietnam.
“We were underweight emerging markets over the past five years and in favour of the developed markets, principally in the US and Europe. We believe the tide has turned and [sentiment] is now in favour of the emerging markets.
“[The EMs] that come out and perform the best will be the ones that have had most significant currency depreciation relative to the US dollar or relative to their major trading partners.”
He believes currency movements have a strong impact on markets. He cited a study by Falcon that showed the principal catalyst for equity upside “is when international investors believe the threat of further currency depreciation is removed”.
For China, he has a more cautious tone when comparing it to other Asian countries. There are concerns in two major equity sectors, he said. One is the earnings concerns in the financial sector, as the nonperforming loan issue has not been fully disclosed. The other caution is the excess capacity in the manufacturing sector.
“We look at equities in comparison to other markets and in comparison to themselves in time. Chinese equities are cheap in comparison to other markets and they are slightly cheap in comparison to [their history]. We have seen enormous volatility there and it is not necessarily the right time to go long Chinese equities,” he said.
He said the house maintains its base case of 0% returns for China equities in 2016.
