Despite the signing of a phase one agreement later this month, the trajectory of future US-China trade relations will remain a constant concern, while fears of a flare up in one of several geopolitical hotspots will again cast a pall on investor sentiment, warned Michael Ryan, group managing director and Americas chief investment officer for the firm’s chief investment office.
“A policy misstep by the Federal Reserve is another exogenous risk, especially as US and global economic growth slows,” he told a media briefing ahead of the UBS Wealth Insights 2020 conference in Hong Kong on Friday.
The presidential election in November is an additional source of volatility, he added.
Nevertheless, he expects high single digit returns by US stock markets, supported by strong corporate earnings as the boost from last year’s interest rate cuts feed through.
“So even though markets are quite fully valued, the bull market will continue,” said Ryan.
His favourite sectors are those which are largely driven by domestic consumption, such as consumer discretionary, technology and communication services.
Managing downside risks in Asia
Ryan’s colleague, Min-Lan Tan, Apac head chief investment officer, shared his optimism — and his circumspection.
“We are staying positive, after a very strong year for Asia asset prices in 2019,” she told the briefing.
Asia is a sweet spot for UBS WM, attracting record amounts of investor money last year, in contrast to flat AUM growth in the US and small inflows in Europe.
She pointed out that Asian equities were up 18%, China equities were 37% higher and Asia credit returned 12% for the year, even though the region was unsettled by fluctuating expectations for a resolution of the US-China trade dispute, as well as its real effect on corporate activity and revenues in the region.
“Economic growth in Asia, including China, Hong Kong, India and much of Southeast Asia, was the lowest since the 1997 financial crisis,” she said.
“Yet, markets were resilient, and now there are strong signs that economic activity is picking up, especially in China — as indicated by the purchasing managers index, and by a positive turn in the technology cycle,” she added.
Tan expects corporate earnings to rise by 10% this year and as a result, her funds are overweight Asia equities, but she is hedging her bets with 10-year US Treasury bonds.
“It is important to stay diversified and to manage downside risks,” she said.
Pairing country positions is one way Tan recommends protection of portfolios.
For instance, she is overweight China equities, but underweight Hong Kong; overweight Malaysia (which underperformed last year), but underweight Thailand.
Another, risk mitigating strategy is to balance allocations to growth stocks with high dividend paying value equities.
Tan noted that many quality companies in the region have high cash levels, which will allow them to return money to shareholders through dividends.
“In a low interest rate and bond yield environment, that is attractive,” she said, and identified banks, telcos and Reits as potential sources of income.
Betting on Asia growth
“Yet ultimately, of course, Asia is still a growth story,” said Tan.
She identified four main investment opportunities in China and the rest of Asia.
First, she expects a “boom in enabling technologies”, as China develops its semiconductor manufacturing capacity, while South Korea and Taiwan should benefit from an upturn in the technology cycle.
Second, the re-setting of supply chains underway for the past two years will continue. Although prompted by the Sino-US trade dispute, “rising wages and the costs of environmental compliance in China will persuade more companies throughout the world to source materials and services from other countries”, she said.
Vietnam, Malaysia and India are likely beneficiaries.
Third, the momentum of China opening up its markets will be maintained, despite tensions with the US. Many sectors, including the financial industry, will improve efficiency as a result.
Finally, China corporate profits are strengthening, and Tan expects an average of 10% earnings growth this year, with new technology firms achieving earnings growth of as much as 25%.
“The long-term structural transformations are still gathering pace in China and elsewhere in Asia, providing opportunities for investors to reap rewards from the application of new technologies, such as 5G and the cloud,” she said.