Allspring is looking to add to its China equity exposure once uncertainty around tariffs settle down.
Matthias Scheiber, senior portfolio manager and head of multi asset solutions at Allspring told FSA in an interview that the investment firm favours international equities over the US.
Since the start of the year, Chinese and international developed market equities have outperformed the S&P 500 index.
“We still have room to add further,” Scheiber said referring to the firm’s China equity position. “We’ve seen a huge run up in Hong Kong equities, so we’re waiting for a better entry level to top up.”
Although Trump has been moving forward with continued threats of tariffs on China, Scheiber said it is likely Trump is more interested in a treaty with the world’s second largest economy. “It’s just too big to be too aggressive,” he said.
“If the Chinese government is more open to the tech sector again, like we’ve seen with the embracing of Alibaba and other tech stocks, I think it will be very positive for the Chinese equity market.”
He added: “If some of the measures to boost the consumer sector start to encourage more domestic consumption, if they start to bottom-out the negative sentiment in the property market, there could actually be a nice rebound this year.”
US dollar underweight
When it comes to FX strategy, Scheiber revealed that Allspring has shifted to underweight the US dollar after being overweight for most of last year.
“It was a good diversifier last year because bonds didn’t really work well as a diversifier against equity risk because you still had uncertainty around rates and inflation worries,” he said.
“But the dollar worked pretty much for the whole year, especially against the euro and other countries more sensitive to China such as Australia, New Zealand or British pound.”
As central banks in Europe look set to cut interest rates more than the US Federal Reserve this year, this would at first glance seem to further strengthen the US dollar’s outlook due to higher rates on offer.
But Scheiber said: “You would normally think with this interest rate divergence the US dollar should benefit, but we believe part of this is already priced-in. Where is the surprise element?”
He argues that there could be a weaker US dollar this year because of the continued uncertainty around tariffs as well as a potential slowdown in the US economy.
He said: “We are seeing more fatigue on the consumer side with some of the latest retail sales indicators surprisingly weak, so if you see the US consumer cutting back a bit because of that uncertainty, you could easily see a slowdown in the US economy.”
In the short-term he warned that the market could start to perceive the Federal Reserve as being behind the curve, needing to cut more aggressively in the second half of the year.
“Last year one of the big shifts by the Federal Reserve was to shift from a pure inflation focus back to more of a growth focus,” he said. “They explicitly said they don’t want to see too much slowing of the US economy, but if they see it, it would give them the justification to cut a bit more aggressively.”
Elsewhere, Allspring also remains bullish on gold, even after its stellar run over the past few months.
Although recent moves in gold prices have been driven by worries over whether gold could be subject to taxes or tariffs, Scheiber said there is a longer term bull case for the precious metal.
“If Trump manages to reduce the trade deficit, it would also mean there will be less dollar demand because there will be fewer exports into the US,” he said.
“People will look for another safe haven asset if there’s less dollar supply out there, and gold is the number one beneficiary.”
