“We’ve downgraded emerging Asia, Latin America and emerging Europe because we think that EM equities tend to only do well when the world economy is booming,” said Khiem Do, head of Greater China investments, at a recent Hong Kong media briefing.
“To me, world growth relies on two economies, and that’s China and the US,” Do said, and he emphasised the results of the trade dispute so far.
Chinese exports to the US “have fallen dramatically” since they were hit with import tariffs, he said. While a few countries such as Vietnam have benefited from the outsourcing of production, “in overall terms, Asian exports have declined substantially largely due to their role in China’s supply chain.
“Singapore exports, Korean exports, Taiwanese exports, Chinese exports, they all tumbled down. It looks absolutely atrocious,” he said.
If the 25% tariffs are imposed on the remaining $300bn of Chinese imports, the impact on the global economic growth will be around -0.6%, on the US -0.8% and in China -1.2%, according to his presentation.
No one can say with any degree of certainty where trade talks are headed, and that together with the 2020 US presidential elections give companies good reason to hold back on capital expenditures, he said. By extension, it means a growth slowdown.
Tactical moves
As a result, Barings’ multi-asset strategic tactical allocations are largely neutral. As noted, the firm does not like emerging market equities. In terms of global sectors, it is downbeat on healthcare and utilities.
On the preferred side, in terms of equity exposure, Barings still likes selected Europe and US sectors such as consumer staples, which are defensive, and energy.
“We think that energy has been a sector that has been restructured, which has a lot of cash and actually pays a very good dividend yield and is very cheap.”
In fixed income, the firm stays away from German bonds but likes US Treasuries.
The firm also took on some US dollar debt and Do said he prefers emerging hard currency bonds instead of emerging local debt.
“Because if we went into emerging local debt, we would have to be very bullish on EM growth,” Do said.
Barings onshore fund
In a separate announcement, Barings said its investment management Wfoe structure in China has been registered as a private fund management company with the Asset Management Association of China (Amac).
The registration allows Barings to offer onshore investments in fixed income, equities and multi-asset to qualified investors in China. The firm has a six month deadline to launch its onshore China fund, according to Amac rules.
The firm set up its IM Wfoe in August 2018 and launched its first Qualified Domestic Limited Partnership (QDLP) product in January 2019.
Barings said it has also been investing in onshore China for global investors through the Qualified Foreign Institutional Investor (QFII), Renminbi Foreign Institutional Investor (RQFII) and Stock Connect programmes.
