“Risk sentiment has improved given growing optimism over US-China trade talks and better than expected corporate earnings,” said Patrick Brenner, head of multi-asset investments in Asia at Schroder Investment Management, speaking at a media event in Hong Kong this week.
Brenner and his multi-asset team have put on several trades that reflect the firm’s expectation that global growth will reach 2.6% in 2020 as the current expansion continues because of better prospects for a resolution of the US-China trade dispute.
Schroders expects a “phase one” deal between the US and China, which should be a catalyst for strengthening global trade and capital investment. Meanwhile, low domestic inflation provides flexibility for a further 0.25% cut in US interest rates to mitigate the risks of recession.
In this positive environment, Brenner believes that taking long positions in selective equities, sovereign bonds, and credit could help “capture return opportunities”.
“We reckon equities will be driven more by multiples [that is, price valuations] than earnings, and in the US we favour the Nasdaq over the S&P 500 as we expect the liquidity-powered rally should continue for the technology sector,” he said.
Brenner emphasised the stronger earnings growth generated by emerging market companies compared with European companies, and their relatively attractive multiples.
“Emerging markets are in a sweet spot”, he said, with the MSCI Emerging Markets index trading on a price-earnings ratio of 13.2% and with earnings growth of 13.7% compared with a 14.8% multiple European stocks and 9.3% earnings growth.
“In particular, any further developments in trade talks could prompt a rebound in Asian assets, in particular Chinese equities and other export-oriented markets such as Korea and Taiwan, where valuations have remained relatively attractive,” he added.
Other asset managers, including DWS, have also turned more positive about Asia markets predicated on the progress of trade negotiations.
Schroders is also positive on some government bonds, such as the US Treasury 10-year note, “despite somewhat stretched valuations”.
“Continuing evidence of weakness in the global manufacturing cycle and additional central bank liquidity should be supportive,” he said.
Brenner also finds valuations of high yield credit “attractive” in these conditions, although he prefers US high yield over Europe “due to the potential adverse impact of rising leverage on corporate earnings and costs”.
“In addition, we expect most Asian central banks to maintain easing policies amid moderating growth [which] will be supportive for Asian credit,” he said.
Yet, Asia dollar-denominated bonds have performed strongly this year, generating double-digit returns, which has prompted some asset managers, such as T Rowe Price, to turn more cautious on the asset class in 2020.
Risk protection
Despite Schroders’s overall optimistic outlook for the global economy and risk asset prices, Brenner is hedging his bets.
“As we enter a new era of uncertainty, investors need to protect their downside and consider alternatives into their portfolios, such as gold which offers diversification as well as falling opportunity cost,” he said.
He has also put on a “soft long duration position with lower directional risks” through buying US Treasuries with a matching sale of German government bonds, because the “Federal Reserve has more room to cut interest rates than the European Central Bank in the [unlikely] event of a slide into recession”.
For a similar reason, Brenner is long the US dollar against the Singapore dollar as a “positive carry hedge” should sentiment towards emerging markets deteriorate.
Separately, Reuters reported this week that Schroders plans to restructure its business to put more emphasis on growth areas such as private assets and wealth management, in a move that will lead to about 200 job cuts.
Schroders, along with other asset managers, is facing cost pressure, FSA‘s sister publication International Adviser reported.
Schroders: 2020 top trades
| 1) Long equities |
| 2) Long Nasdaq vs S&P 500 |
| 3) Long high yield vs investment grade credit |
| 4) Long emerging market equities vs Europe equities |
| 5) Long US Treasury 10-year vs Bund 10-year |
| 6) Long gold |
| 7) Long US dollar vs Singapore dollar |
