The Deutsche Bank-owned wealth manager is currently overweight China and Thailand because of corporate earnings growth potential, and neutral India and Indonesia – but with a positive bias following their incumbent presidents’ re-elections.
“We see upside of 6-8% in the MSCI China index over the next 12-months, and even greater upside for H-shares [companies incorporated in mainland China with shares traded on the Hong Kong Exchange]. In terms of sectors, we prefer domestically-oriented companies, such as consumer staples and discretionary and financials,” said Taylor.
DWS also recommends Asia credit because of its “competitive risk-adjusted returns compared to non-Asian emerging markets, the [yield] spread premium over US investment grade and high yield corporate bonds, and their limited correlation with US rates and credit”, said Taylor.
End of EM contagion?
Taylor’s sanguine global outlook – albeit tempered with caution – is predicated on continued low-inflation growth in the US, low interest rates worldwide and generally stable corporate earnings.
“The Federal Reserve’s dovish interest stance and a flat US dollar, China domestic growth stimulated by recent policy measures, and the end of contagion [within the global emerging markets as an asset class] are the key factors to be more constructive on emerging market equities,” he explained.
These arguments underpinned Taylor’s outlook for emerging Asia markets at his previous Hong Kong media briefing in March.
However, he is now more cautious, especially after the rally in emerging markets and credit in the first four months of this year.
He highlighted perils to his strategic outlook, including slower global growth, more volatility in debt markets, the timing of China stabilisation, regional geopolitics – such as Iran – and especially a “protracted US-China tariff war where there is no deal in sight”.
For instance, DWS remains underweight South Korea and Taiwan equities. Both countries are impacted by US-China tensions over technology due to domestic company exposure to the supply chain of sanctioned Chinese firms.
Among other emerging markets, it is overweight equities in Russia, which continues to show strong GDP and corporate earnings growth and neutral Brazil, which has been slow to deliver post-election reforms. Equity underweights are in central Europe, Mexico, South Africa and Turkey, due to a combination of political concerns and economic imbalances.
So, although DWS has a “strategic” preference for risk assets, “the tactical view is that markets will move sideways in the short-term given the US- China trade conflict. We suggest staying with companies and countries with good fundamentals. Seasonality is not in favour”, said Taylor.
In fixed income, the firm currently has overweight positions only in US Treasuries and European investment grade corporate bonds, according to material distributed at the briefing. Otherwise, it is a neutral across all broad market sectors – including major developed market equities, emerging markets (overall) and Asia (including Japan) equities – except UK government bonds and the euro currency, where it is underweight.
“We prefer, high quality fixed income to equities on a tactical basis. This stance is much more cautious than our overall strategic positioning. We have had a very good run in equities markets in the first quarter of 2019, and are now looking to protect gains. We will play it safe then look for opportunities of further upside,” said Taylor.