“The flop in US-China trade talks and posturing on key technologies of the future” has soured Andrew Swan on the outlook for Asia and global economic growth, at least in the short-term.
“Growth is decelerating. We do think policy makers will move very quickly globally to try and cushion the effects of the tariffs,” said Swan, head of global emerging market equities at Blackrock, speaking at a Hong Kong media event yesterday.
“The primary driver of equity returns in the region is profit growth. When we look at the outlook for corporate profit growth in the region, we see a very subdued environment in the new regime that we are now entering,” he said.
Swan manages the Asian Dragon strategy as well as being a co-manager on the Asian Growth Leaders, Asia Pacific Absolute Return, Global Emerging Markets, and Indian strategies.
His Asian Dragon Fund has a 36% allocation to China, in line with the benchmark MSCI AC Asia ex Japan, the factsheet shows.
“We have raised cash levels, reduced exposure to technology companies given potential vulnerabilities and increased exposure to defensive areas, such as utilities, healthcare and telecom. This has led to scaling down our previously overweight position in China.”
He believes China is in a different situation now than it was about ten years ago when the global financial crisis erupted. The fiscal deficits are significantly higher and debt-to-GDP is about 100% more than a decade ago. “The scope for significant support is certainly more limited [than it was in 2009],” he said.
“For the last six-to-nine months, we have shifted our portfolios away from cyclicality and value in reflation towards quality growth, high return companies [in the region],” he noted.
From a country perspective, he likes India and Indonesia. “Companies in sectors such as healthcare, education, internet, these are companies and sectors that can grow above GDP growth in the region and therefore they have the highest potentiality to actually grow corporate profits in a very low growth environment.”
However, if tariffs on Chinese goods are increased further, his portfolio will become even more defensive, he said.
“I do see some downside to the markets from where they are today,” Swan added. “We are expecting another downturn in profitability in the second half, given the significant geopolitical risk,” he noted.
Asian Dragon and Asian Growth Leaders vs the benchmark and category average
