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Daiwa advises Asia investors to be risk-off

The firm's gloomy outlook sees falling global growth the next two years with increasing concern over equities.
National flags of countries who are member of AEC (ASEAN economic community) on blue sky background

Daiwa Capital Markets’ equity recommendations have become defensive as it expects global growth to slow next year and in 2021, according to Paul Kitney, Hong Kong-based chief strategist for Asia-Pacific.

Taking out economic forecasts, Kitney expects that global growth will be 1.7%-2% up to the middle of next year. However, that growth is expected to drop up to 0.6% in the second half of 2020 and around 0.2% in 2021.

“We should be really looking at being risk-off and being concerned about equities as an asset class fairly soon,” he said during recent media briefing.

Like other investment managers, one of Kitney’s biggest concerns is the ongoing trade dispute between the US and China.

He added that although the US may not be in a technical recession at the moment, trade volumes have dropped significantly in the past few months.

Source: Daiwa Capital Markets

“If we see a little bit of a time out as far as the trade war is concerned, with the backdrop that PMIs might be stabilising, that might be enough tactically for a little bit of risk on – but only going into the new year,” he added.

Positive on Asean

Kitney is positive on markets that are less exposed to the trade war, which include India and emerging Asean.

“These markets are detached to some degree to the global trade cycle,” he said, adding that the correlation between the global trade cycle and GDP growth in these markets are low.

His forecast for India runs in contradiction to Moody’s, which last week downgraded India’s rating to negative from stable, citing a list of domestic economic concerns including weak job creation and a credit crunch among non-bank financial institutions. The concerns increase the risk that “economic growth will remain materially lower than in the past”, the ratings agency said.

Source: Daiwa Capital Markets

Southeast Asia is possibly different. Other fund managers, such as Pinebridge Investments and Dragon Capital, also believe that emerging Asean markets should be beneficiaries of the ongoing trade dispute between the US and China.

“The whole Southeast Asia region is a trade-war beneficiary. Supply chains are shifting to Southeast Asia from China,” Bill Stoops, chief investment officer at Ho Chi Minh-based Dragon Capital, said recently.

On the other hand, Kitney is cautious on markets that are more exposed to the global trade cycle, such as Korea, Japan, Taiwan and Singapore.

The firm also prefers defensive sectors, such as telecommunications, utilities and consumer staples, as well as companies with strong financials and high dividend yields.

Part of the Mark Allen Group.