No risk of recession next year — Principal

This article first appeared in The Edge Financial Daily, on October 4, 2019.

Jablonski says recession risks are not overplayed, but instead, reasons for optimism are ‘under-blown’. Photo by Bloomberg

-A +A

KUALA LUMPUR: While there are legitimate concerns over the strength of the global economic recovery, an investment manager says investors should not be preparing for a recession in 2020.

Principal Portfolio Strategies chief investment officer Todd Jablonski said indicators are showing that the current economic slowdown could level off with potential increases thereafter.

“We have seen three separate slowdowns since the global financial crisis,” Jablonski told reporters on the sidelines of the Principal Asia Summit here yesterday. “Since March 2009, we have first had the European sovereign debt crisis that was approximately a 20-month slowdown, secondly we had noise in 2017 around commodities and that was a 17-month slowdown.

“The current [and third] slowdown is sitting at 20 months now. Based on the macroeconomic data that we see, particularly around the Organisation for Economic Co-operation and Development (OECD) indicators in Asia, it gives us a perspective that says we see a flattening in that negative trend, and that gives an opportunity in the fourth quarter of 2019 into the early 2020 for the economic landscape to improve,” he added.

According to Jablonski, recession risks are not overplayed, but instead, reasons for optimism are “under-blown”.

“I do not see the current slowdown ending in crisis. There are always exogenous ‘shock risks’, and I would say that those risks are more pronounced than usual, particularly around what I call ‘tweet risks’ or other ‘trade risks’ that can actually affect the market. And with risk velocity increasing, those events can be priced into the event more quickly,” he said.

Noting that China has stopped tightening its lending standards, Jablonski said: “We have seen a rebound in the OECD indicators for our five key Asian countries (China, India, South Korea, Japan and Indonesia) that give us optimism for the future.

“Those things should be trumpeted a bit more loudly — as well as the strength of the consumer and service sectors — to give investors some comfort that it’s not necessarily a recession they should be preparing for, it could just be a slowdown that resumes to a growth trajectory,” he said.

The Kuala Lumpur stop of the annual Principal Asia Summit was organised by Principal Asset Management Bhd, and focused on how investors can navigate and find opportunities in an environment of uncertainty, volatility and heightened risk velocity.

At the summit, Principal Asia president Thomas Cheong pointed out that the risk velocity is now growing on a day-to-day basis. Risk velocity refers to risks that are not just challenging themselves, but move from peripheral threats to portfolio impacts at an elevated pace.

Cheong said now is possibly the most challenging time for the markets since the global financial crisis, given the uncertainties resulting from the US-China trade war and the situation in the Middle East and North Korea, and on top of that, other issues such as impacts of technology advancement on industries as well as demographic shifts.

The key to navigating the current market conditions, according to Principal Asset Management Malaysia chief investment officer of equities Patrick Chang, is diversification and a focus on structuring portfolios with much higher yields.

These include global diversified income strategies, looking at global real estate investment trusts, as well as at relatively defensive markets such as Singapore, he said.

Meanwhile, Jablonski encouraged investors in Malaysia to return to strategic asset allocations by assessing their risk appetite, before making tactical deviations, and to adopt a defensive posture by reducing the standard deviation of returns, with a focus on large-capitalisation stocks, stable quality firms, and emphasising the better quality ends of fixed income.