Schomer, speaking at a media event in Hong Kong on Tuesday, said global growth was rebounding before Donald Trump’s victory in the US presidential election earlier this month. “What Trump will do in this environment is accelerate this process.”
He emphasised the potential impact of the fiscal and tax policies the new administration has proposed. For example, a reduction in the corporate tax rate translates to an automatic increase in US corporate earnings estimates.
What investors are nervous about is the impact of the anti-global trade policies that Trump has promised to push through. But Schomer believes it will be complex and difficult to re-negotiate trade deals or even impose additional import tariffs on trading partners.
“If you raise trade barriers or impose tariffs, you harm US businesses and US consumers,” he said.
Equities to benefit
According to Schomer, the underlying global economy has become more pro-trade. Business investment is expected to rebound because excess supply has diminished, and this in turn will stimulate manufacturing and global supply chains.
“We also see an improvement in the emerging markets, and this is a trend that was already here before [the US election],” he said. “A stronger US economy could amplify this.”
The positive macro backdrop is good for equities for the next five years, according to Anik Sen, global head of equities.
“It’s the reason why in our equity portfolios we haven’t made a whole lot of changes. In fact, we’ve added to some of our positioning because we just increased our conviction levels,” he said.
He favours US small- and mid-cap stocks and select EM stocks.
EM equities underperformed during the last five years to 2015 due to several factors, such as high volatility in foreign exchange rates, declining commodity prices and a strong US dollar, he said. But those factors, he believes, have reversed.
“If global growth is increasing, the fact that the US is reflationary means you have a leveraged effect on emerging markets.”
He is positive on US technology-related stocks, industries that benefit from infrastructure spending and US regional banks.
“Banks like to behave in a pro-cyclical way,” Sen said. “With higher rates, banks have more earnings, and with greater confidence in the economy, banks take on more risks.”
Pre- and post-Trump fixed income
Investors have not been fair or objective enough when looking at the macro events that are driving fixed income, according to Arthur Lau, Hong Kong-based head of Asia ex-Japan and co-portfolio manager for EM.
“The market has responded negatively to fixed income, especially in terms of global EM and Asia,” he said.
However, just before the US elections, the return on Asian dollar bonds was 100 bps higher than the Hang Seng Index, which returned around 4.5% year-to-date.
“If you look at year-to-date, pre-Trump, volatility-adjusted returns in Asia investment grade bonds actually outperformed many of the asset classes, including the S&P500,” he said.
That low volatility-adjusted return is one of the reasons why many institutional investors invest in the asset class, Lau noted.
In addition, during the two weeks after Trump’s win, Asian EM corporate credit bonds faired better compared to global EM excluding Asia, according to Lau.
The risk of the December rate hike is already priced in. “The market, even before Trump, already expected a 25 basis hike [in interest rates] in December, and we have already assumed some of these rate risks.”
However, expected elevated volatility in the first quarter will impact fixed income, he added.
The firm is positioned defensively. Pinebridge has cut lower quality bond exposure to reduce beta for their portfolios that follow a benchmark, he said.
Among his fixed income overweights are short-dated high yield bonds and top tier China state-owned enterprises. His underweights include long-dated high yield Chinese property, India public sector financials and short-dated Korean bonds.
