A policy pivot from the US Federal Reserve is prompting Manulife Investment Management to reconsider the firm’s views on Asian equities.
Chairman Powell’s recent comments at Jackson Hole “effectively endorsed” the market’s current assumption of an fast-approaching US rate cut cycle, according to Marc Franklin, senior portfolio manager for Manulife’s multi-asset solutions team.
“That has implications for capital flows, risk appetite and FX rates – particularly the US dollar versus Asian currencies,” he said.
Although the firm has had a preference for the US and Japanese equity markets for most of the year, Manulife’s multi-asset team are starting to take a closer look at the rest of the Asian equity markets.
“The question we now ask ourselves is the timing appropriate to start to bring in to our set of preferred markets, some of the Asian markets which would benefit from a more dovish monetary policy setting in the US – and by extension a weaker US dollar,” Franklin told FSA in an interview.
The US dollar has been declining over the past few months in anticipation of interest rate cuts from the Federal Reserve.
“We watch now very carefully the extent to which the recent softening of the dollar can persist,” Franklin said, stressing that they have a very selective approach when it comes to Asian equities.
Preference for India and Indonesia
Despite what appears to be a tailwind looming for Asian equities more broadly, Franklin said he is still reluctant to take a bullish view on the region as a whole.
“The jury, to some extent, is still out,” he said. “One of the reasons for that is the regional economy’s growth cycle is still somewhat sluggish in Asia.”
He attributed most of this sluggishness to subdued economic growth in China, which is an important driver of growth in the Asia region.
“It also has to do with some of the more disciplined central banks in Asia running careful monetary policy approaches in the few years and we proxy that by looking at the gap between the central bank base rates and the current pace of inflation,” Franklin added.
“Central banks in the region have been wary about easing policy too soon, China’s growth continues to be somewhat sluggish and therefore the regional economy is not showing sufficient evidence that its growth path and the pace of growth is going to materially outperform, say, the US.”
This is why the firm has not pivoted in a big way more towards Asia or emerging market asset allocations.
That being said, Manulife does have a preference for select markets within Asia, particularly India and Indonesia.
Franklin said: “These are markets which, for different reasons, have a certain resilience about them and are not necessarily caught too much in the crosshairs of a fairly troubled global trade backdrop and some of the implications of geopolitical tensions and themes such as de-globalisation.”
When it comes to India, he said the country has a strong domestic growth cycle which is “relatively immune” from global trade dislocations.
Furthermore, after clearing the election earlier this year, investors now have visibility on the domestic policy agenda under Narendra Modi, albeit under a coalition government.
“As for Indonesia, it has a strong position in being an energy and a net commodity exporter, particularly in a world of increasing scarcity of and competition over sources,” Franklin said.
“The central bank, even though it has adopted a fairly cautious monetary policy approach, maintains a high degree of credibility in the markets, which is important,” he added.
Like India, Indonesia has also gone through an election cycle, allowing investors some degree of visibility on policymaking where Franklin said “it looks like the status quo will be maintained under the new presidency”.
