Khiem Do, Barings
“If you are going to look long-term, there is only one market in the world which makes sense and that is US equities,” Hong Kong-based Do said at a recent media briefing.
In the last 20 years, Do believes that investors have made more money in US equities than in Europe and Japan equities.
Although there are investment opportunities in Europe and Japan through stock selection, their overall equities markets have been “monotonous and quite flat”, he said, adding that demographics in both markets have not been favourable.
“So it’s quite difficult to build a very strong bull case for both markets, but it is easy to build one for the US.”
He added that there is consistency to the way US businesses are managed.
European equity valuations on average have come down, but it is still difficult to get satisfactory returns
“CEOs in the US are very focused on return-on-equity, profit margin and share price. And it doesn’t matter who is in charge of the government. US corporates look after themselves carefully.”
Do added that while European equity valuations have become cheaper, he still finds it difficult to get satisfactory returns from the asset class.
“They are extremely cheap and I would love to buy. But every time I buy, valuations get halved again.”
20-year returns of key equity markets
Source: FE. In US dollars.
For the long-term, Do also likes emerging markets.
“Growth will continue in the emerging markets of Asia, Latin America and Eastern Europe, where demographics are becoming favourable and debt levels are low.
“So if I want to leave something for my daughter’s education fund, I’d invest in US and emerging markets equities,” he added.
However, volatility in emerging markets continues to be a risk, he said.
“The volatility in emerging markets is twice as much in the US. So if you buy at the wrong time, you will lose massive amounts of money. But in the US, even if you bought at the wrong time, you will still make money.”
The firm’s Global Multi Asset Income Fund, which is a Hong Kong-domiciled fund managed by James Leung, co-head of Asian multi-asset, has 8.7% of its portfolio in North America equities, which is the largest allocation for its equity sleeve, according to the fund factsheet. Overall, the US accounts for 32.7% of the overall portfolio.
Barings Global Multi Asset Income Fund asset allocation
Source: Fund factsheet
Do also said that investors should be more realistic about return expectations.
He expects that overall returns for global markets will between 4-6% in the next 10 years.
“For 2019, we had a massive rally year-to-date, but I think from here on, it is not going to be easy.”
He believes that volatility will continue this year. Although global equity markets have rallied in the past two months, outflows from global equity funds continue.
Do explained that investors continue to be pessimistic about slower economic growth. Earnings in the US are also expected to grow just 3-5% this year, compared to around 23% growth last year.
“Investors believe that the 3-5% earnings growth is too close to zero, so that is why investors are reducing their position in global equities,” he said.
However, he believes that there will be no recession in the near term.
“A lot of investors think we are going to have a [near-term] recession. So be careful of that notion because not everyone is sharing that view.”
The Barings Global Multi Asset Income Fund versus its sector in Hong Kong
Source: FE. Note: The fund has no benchmark index.