Equities poised to outperform

This article first appeared in The Edge Financial Daily, on July 22, 2019.

(From left) Jaradi, Supreet, Ho, Li and Liang during the The Edge-Standard Chartered Market Outlook Forum 2019’s panel session at JW Marriott Kuala Lumpur on Saturday. Photo by Suhaimi Yusuf

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KUALA LUMPUR: Equities is expected to outperform against the backdrop of a slower economic growth and looser monetary policy environment.

However, investment opportunities can also be found in other asset classes like fixed income and currencies, said speakers at The Edge-Standard Chartered Market Outlook Forum 2019 held on Saturday, themed “Navigating the new normal”.

The US Federal Reserve (Fed) is widely expected to cut rates at its policy meeting at the end of this month, a move that would bode well for stocks.

“History has shown that whenever the Fed has embarked on preventive rate cuts — or ‘insurance’ rate cuts — equities tended to perform significantly well in the subsequent 12 months, provided it’s not followed by a recession,” said Manish Jaradi, senior investment strategist at Standard Chartered Bank (StanChart) in Singapore.

“As we see very low probability of US recession in the next 12 months, our view is that equities will continue to perform going forward,” he adds.

Jaradi said if the Fed does cut rates, other central banks will follow suit, gradually easing their policies. “It is quite possible then that the global economy will turn around as a result,” he added during his presentation, “Standard Chartered Market Outlook & Investment Decisions”.

Despite elevated valuations, the US remains the banking group’s preferred equity market. Lower bond yields and a looser monetary policy are supportive factors, Jaradi said.

He also sees Asian equities gaining support in the current weaker US dollar and dovish Fed environment. Additionally, if China’s economy stabilises, that will be a big additional boost to Asian economies, and by extension, Asian equities, he added.

Philip Li, senior fund manager at Value Partners Ltd in Hong Kong, is also optimistic about Asian stocks, due to various positive macroeconomic factors.

“The [overall] pace of GDP (gross domestic product) growth is deteriorating, but right now, no one is predicting a recession of a significant level. Central bank [monetary] accommodation is likely to have a positive effect because the US Federal Reserve is already responding early. Hot money flows and debt levels are also not very high [in general]. Looking at it from all of these angles, we have a slightly more positive view on Asian equities.”

The shift by central banks towards monetary easing has boosted the performance of equity markets around the world this year, said The Edge publisher and group chief executive officer (CEO) Datuk Ho Kay Tat in his welcome remarks. He added that US stocks, in particular, snapped back from its worst performance since the global financial crisis last December.

“Following the Fed’s shift in tone as it abandoned plans to raise interest rates in light of an expected slowdown in the economy, US stock prices began to climb. As a result, the S&P 500 hit new record highs on April 23 and again on June 20. Just over a week ago [on July 10], it breached the 3,000 mark for the first time,” said Ho.

Meanwhile, Value Partners’ Li said investors cannot afford to ignore the China market, as its economy is expected to be bigger than that of the US by 2030. China is currently the second largest economy in the world. “China’s economy is growing at 6% to 7% [yearly]. That’s a huge amount of growth.”

“What does this mean when you are No 1 in terms of GDP globally? You get a very big seat at the table to talk about trade, currencies and military issues. And that is why right now, the US remains highly threatened about the strength and pace of Chinese growth,” said Li.

Yuejue Jin, senior investment specialist for multi-asset solutions at JP Morgan Asset Management in Hong Kong said the ongoing trade tensions between China and the US might take other forms in the future, such as a war on technology or intellectual property.

In her presentation titled “Trumping in times of tension — succeeding amid volatility with multi-asset investment solutions”, Jin said that most people may think that the US has an upper hand in the trade war. However, the relationship between the two countries is actually very complicated and dynamic. For instance, the three tranches of tariffs that the US imposed on China’s goods have not really targeted consumer goods so far, she added. This will change if the US continues to impose tariffs on China.

If prices of consumer goods are affected, US president Donald Trump could see an upsetting re-election result. That potential outcome could prevent Trump from continuing with the tit-for-tat exchange, added Jin.

While fixed income instruments were not spared from the uncertainties arising from the trade tension, there are still bright spots in the segment, said Jonathan M Liang, senior investment strategist for fixed income at AllianceBernstein Holding LP.

In his presentation titled “Beyond the trade war: Seeking income amidst strategic rivalry and deglobalisation”, Liang said there are two investable themes in fixed income that have surfaced as a result of the seemingly unending trade negotiations between the world’s two largest economies — the attractiveness of the US high yield bonds and emerging market debt instruments.

Unlike investment-grade corporate bonds, high-yield bonds have lower credit ratings. However, due to the higher risk of default, these bonds pay a higher yield. “The US high-yield bonds are debts issued by smaller companies with business operations that tend to be more domestically focused. These bonds are relatively immune to global trade tensions,” Liang said, adding that 64.5% of the US GDP is driven by personal consumption.

On the currency front, StanChart’s Jaradi said the euro, British pound and Australian dollar could strengthen against the US dollar going forward. In his presentation titled “Currency volatility: A friend, not a foe”, he said the European Union (EU) had experienced stable economic growth since the beginning of the year.

This is a positive factor that could contribute to the further strengthening of the euro against the US dollar, said Jaradi. The euro could also continue to appreciate against the US dollar once the issue between the EU and Italian government is sorted out, he added.

The British pound, which is currently trading at about US$1.25, is undervalued and could appreciate against the US dollar going forward based on results showed through technical analysis, said Jaradi. He added that the uncertainties surrounding the outcome of Brexit had also been reduced recently.

“We expect that the UK is either going to have a soft Brexit or no Brexit at all. Interestingly, an international newspaper published a poll result recently showing that people in the UK would rather have a second referendum [on Brexit] or have no Brexit at all, instead of going through a chaotic process of having a hard Brexit.”

Earlier, in his opening address, Standard Chartered Bank Malaysia managing director and CEO Abrar Anwar said that the rapid pace of economic events is marking the beginning of a “new normal” characterised by changes in the use of leverage, nature of consumption patterns, and appetite for risk-taking.

“We can’t control market events, but we can certainly build a ship and equip ourselves with knowledge that can navigate the ocean under all weather conditions.”

Going forward, JP Morgan head of Southeast Asia funds and institutional sales Supreet Bhan reminded investors to guard themselves against common cognitive biases when it comes to investing solely for instant gratification. These biases have resulted in events such as the dotcom bubble, when investors were simply throwing money at internet companies with scant regard for their fundamentals, business models, and financial performance.

“Most recently, the cryptocurrency craze is the latest of these investment mania; it is the investor’s need to make quick money which triggers this and many other bubbles like it,” he added.

The forum was held at JW Marriott Kuala Lumpur with about 400 people in attendance.