‘Nothing has changed and yet everything has changed’: FSA Breakfast Briefing Equities

Participants on the equities panels at the recent Fund Selector Asia Breakfast Briefing events in Hong Kong and Singapore agreed that the pro-growth policies of the incoming Trump administration would outweigh the inflationary impact from higher tariffs, although they warned that markets should brace themselves for more volatility.

President-elect Donald Trump has pledged to introduce sweeping tariffs on goods coming into the US with levies of at least 60% on Chinese imports and a blanket import tariff of 10% on goods from elsewhere.

However, panellists agreed that the impact of these policies, which could help stoke inflation during a period when the Fed has begun to pivot, would be offset by his other policies, notably a pledge to lower corporation tax to 15% for companies that make their products in the US and a bonfire of regulations from sectors ranging from energy to banking.

The corollary of his policies though would be heightened volatility, particularly as it was not yet certain whether he would follow through with some of his more aggressive measures particularly around trade.

“Overall it’s good for business, but we’ve tried to prepare our clients that there’s going to be a lot of mess, a lot of volatility before we get anything looking like assuredness,” said Andrew Hendry, Asia CEO for Janus Henderson Investors.

Those views were echoed by Noli de Pala, chief investment officer at TriLake Partners, who said that the prospect of higher inflation meant that Trump may look to walk back some of his campaign pledges around trade.

“Nothing has changed and yet everything has changed. But it’s only to the extent that these changes in the fabric of the country will somehow affect nominal earnings or growth that concerns us as investors. We don’t see that. Trump is smart enough to recognise that he’s going to kill himself in the midterms if all he says on the campaign trail is truly inflationary,” he said.

Cheuk Wan Fan, managing director and chief investment officer for Asia at HSBC Global Banking and Wealth, explained that the firm’s global investment committee had added to its overweight to US equities after the election because of Trump’s pro-growth policies, while at the same time they had downgraded the eurozone equity market to a mild underweight reflecting the increased tariff risk and moved EM Asia equities to neutral as well.

Markets elsewhere

Overall, panellists were not as sanguine about the opportunities outside the US. In Asia, India and Japan were their primary picks, unsurprising given the performance of both markets in the last several years, albeit Japan has faded recently following the unwinding of the Japanese yen carry trade in August.

“We reiterate our strong conviction for Japanese equity as I think stock valuations will be driven not only by the weaker yen but also by domestic price and volume growth for Japanese companies’ business activities. We see a lot more real wage growth, reflecting the recovery trend in real incomes,” said Connie Sin, head of funds and alternatives for international wealth management at Nomura.

“A lot of people think of India as expensive but the valuations are coming down. India will always be at a premium when it comes to Asian equities, but they are at a premium for a reason. Every time the world is in a little bit of a mess and volatility is heightened, the flows tend to go to India because India is very domestically focused. They are less impacted by external noise,” said Amanda Lee, director and head of portfolio and traditional specialist for Asia Pacific at Citi Global Wealth Investments.

The panellists were overall more circumspect about China, noting that despite the recent stimulus efforts, which had caused the Hang Seng index and the CSI 300 index to rally 32% and 34% respectively, most of these efforts were piecemeal and would not be enough to move the needle long-term.

“We do expect Chinese policymakers will roll out more policy stimulus going into 2025 but so far we have seen Beijing’s approach in introducing the policy stimulus remain incremental and reactionary. We are still waiting for more demand side and consumption focused stimulus actions,” said HSBC’s Fan.

With regards to Europe, the panellists were overall less constructive as well, noting that although there are opportunities among some companies in the semiconductor supply chains, structurally it continued to lag the US.

“We’re a big European equity manager and for love or money you cannot sell European equities outside of Europe. Outside of home bias, if you look at the S&P in the last 10 years, why would you invest anywhere else? We have to accept there are certain structural elements to shareholder value focus in the US, whereas other markets don’t have that,” said Janus Henderson’s Hendry.

‘Forgotten 493’

Notwithstanding the backdrop of Trump’s election victory, the panellists noted that there remained opportunities to align with long-term structural themes and Jean Maunoury, deputy CEO and CIO for research and investment, at iM Global Partner, pointed out that market returns have historically been robust regardless of who controlled the White House.

“One of our partners based in New York (Richard Bernstein Advisors) found in their research that the S&P 500 rose by exactly the same amount (16.3%) under both President Obama and President Trump. I find that really interesting considering they had completely different policies,” he said.

One of the most eagerly discussed topics was the opportunities in the small and mid-cap space. US small caps have been mostly out of favour when compared with their large cap peers over the past few years as their performance has languished. The S&P 500 index has returned 27.5% over the past three years, whereas US small caps, as represented by the Russell 2000 index, are down 2.1% over the same period.

Although, the recent bout of volatility that hit markets in July represented an inflection point and small and mid-cap stocks have started to outpace the Magnificent 7 since then. Small and mid-cap stocks also tend to do better when interest rates begin to fall because of their higher debt ratios, which means the current environment is set to provide a constructive backdrop for them.

“One of the things that we’ve seen over the last few years is that the opportunity set in small caps has really improved and we’ve seen much better traction in our ability to exploit those mispricings. Small cap as an asset class, that premium has disappeared over the last several years with the Magnificent 7 outperforming the market significantly and smaller caps being more susceptible to the increase in interest rates. We think it’s a good time to get back into smaller caps,” said Ram Rasaratnam, chief investment officer for equity QI at AXA Investments Managers.

“The outperformance of the Magnificent 7 may have already peaked. So we very much focus on the broadening earnings growth from the forgotten 493 as they have shown improving earnings momentum,” said HSBC’s Fan.

In terms of sectors, the panellists were enthusiastic about anything which touched upon AI because of its ability to drive innovation, for example by significantly compressing the development cycle for new drugs in healthcare. Financials was also another popular pick among the panellists and was seen as a potential hedge against inflation.