The Edge-Citigold Wealth Forum 2019: Opportunities in Asian EM equities, says Citi

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 4, 2019 - March 10, 2019.
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Asian emerging-market (EM) equities are still favoured over those in developed markets due to the opportunities arising from higher domestic consumption. This outlook comes even as the region’s stocks brace for greater volatility this year, said Jai Tiwari — Citi’s foreign exchange strategist for Asia-Pacific, Europe, the Middle East and Africa — at The Edge-Citigold Wealth Forum 2019.

“When we talk about Asia, we are talking about its outbound trade. Obviously, the trade tensions between the US and China have been a liability. But countries such as India and China have been trying to promote their own domestic consumption stories. We think that is where the opportunities lie,” he added.

Tiwari was giving a presentation on “Volatility and opportunities in the late-stage bull market”.

To illustrate his point, he pointed out that in the two decades since the 1997/98 Asian financial crisis, Asian EMs’ share of global private household consumption has more than doubled to 23% from 9%, with China being a significant contributor of this growth at 14%, from just 3% in 1997. By comparison, the US’ share of global private household consumption remains at 1997 levels, at 29%, he added.

Earnings per share (EPS) growth in Asian EMs is also looking good this year, said Tiwari, who thinks it will decline slightly to 11% from 14% last year. Meanwhile, EPS growth in the US is expected to drop to 11% from 22% previously.

Citi is also positive on European equities. Tiwari said the eurozone is currently enjoying enormous growth in domestic consumption. “The Services Purchasing Managers’ Index is looking very good. But where the issue lies, of course, is in manufacturing. This is directly related to exports affected by temporary factors that will fade over time.”

EPS growth in Europe was about 10% last year. Tiwari said it is expected to be the same this year. However, if there is significant secondary impact from US trade policies (for example, the imposition of additional import tariffs on European cars), the forecast may fall to a growth of 7% or 8%.

Apart from looking for ways to benefit from the growth expansion in Asian EMs and Europe, investors should consider seeking shelter in fixed income this year, said Tiwari, adding that Citi still favours US investment-grade bonds.

“Spreads are tight, but we like the valuations. The US Federal Reserve has turned a corner and has become more data-dependent [in its quantitative-tightening policy]. It will probably end its balance-sheet normalisation as early as June,” he said.

Citi also likes EM debt — both US dollar and local currency-denominated. “Even if China’s growth slows further and the trade tensions are not resolved, the supply chain is diversifying out of China into other Asian countries such as Malaysia and Thailand. We think that Asia and EMs as a whole should continue its resilient story throughout the year,” said Tiwari.

On the currencies front, he said US dollar strength — which investors have seen since April last year — is unlikely to last. The strength was due to a number of domestically and externally-driven factors, including the economic slowdown in Europe and China.

Additionally, a deterioration in the US’ twin deficits (fiscal and current accounts) and a more cautious Fed stance could result in the US dollar’s weakness. “I think the real test for the dollar is when the Fed concludes its balance-sheet normalisation. When that happens, there are obviously very few factors that will support the US dollar,” said Tiwari.

“Concurrently, the [growth of] other economies is likely to pick up. A reversal of the dynamics that are supporting the US dollar could happen if the other central banks, such as the European Central Bank and Bank of England, take on a more hawkish stance. That is something to watch out for, perhaps by the second half of 2Q2019 or the end of 1H2019.”

Tiwari said investors should consider diversifying their portfolios across various asset classes — such as equities, fixed income, commodities and foreign currencies — to navigate the uncertain market conditions this year.

“Foreign exchange (FX) is my area of expertise. So, I would like to highlight that when we talk about diversification, we must also consider diversification in the FX asset class. That is because any gains you make in fixed income or equities in foreign currencies can be undone by the currency movements. Thus, it is very important to consider FX hedging strategies to protect your portfolio,” he added.

In addition to adopting a multi-asset strategy, investors should also look at the long-short strategy, said Tiwari. This where investors buy equities that are expected to increase in value and short-sell those that are expected to decline.