In October last year, Deutsche Bank Wealth Management had a high conviction call on Chinese equities, recommending investors allocate to the asset class. The bank expected that Chinese equities would perform strongly on the back of tax reforms and other policy moves, despite the ongoing trade tensions with the US.
Investors who followed the bank’s call would likely have profited. After slumping in 2018, the MSCI China Index year-to-date has returned 12.26%, while the CSI 300 Index returned 27.69%, according to data from FE Analytics.
However, the bank has become more cautious on the asset class and is now recommending clients take profits, according to Tuan Huynh, chief investment officer and head of discretionary portfolio management for emerging markets.
“After seeing a strong rally, we are a little bit more cautious on the asset class shorter-term. Industrial profits, for example, have started to decline, which is also a function of the trade conflict between the US and China,” he said during a recent media briefing in Hong Kong.
Huynh added that business sentiment is starting to wane and companies have started to delay capital investments.
“A lot of our Chinese clients are also businessmen and entrepreneurs, and a lot of them are telling us that as long as you don’t know how this trade conflict will play out, you might just delay or postpone your [capex] investment,” he said.
A clearer picture of the trade war outcome should make the bank be positive again on the asset class, he added.
Shift to defensive sectors
Separately, Christian Nolting, the firm’s global chief investment officer, is recommending clients shift towards the more defensive sectors in the market.
Nolting noted that he does not expect negative earnings, particularly in the US, this year. However, even without tariffs, he only expects earnings to be at 6%, which compares to the market consensus of 11%.
“The market is a bit too optimistic as you are seeing lower growth. We are seeing the implications of the late-cycle, so there is some room for disappointment,” he said.
Like Huynh, Nolting believes that investors should take profits now and shift toward the more defensive sectors in the market, such as real estate, utilities and consumer staples.
“At the beginning of the year, sectors such as IT and industrials did quite well, but since May, you have this downturn, and since then real estate, utilities and consumer staples have become the areas in the market that are doing much better,” he said.
Deutsche’s portfolio protection stance is in line with rival banks. The key recommendation from others, including UBS Wealth Management, JP Morgan Asset Management and Citibank is to position the portfolio defensively.
Deutsche is also avoiding currency risk when investing in emerging market fixed income, a position that has changed over the past ten years.
“If you are going into emerging markets, you have the opportunity to go local, but if you are taking on additional currency risk, you also want to be rewarded with a higher yield,” Huynh said.