“Should we see increased trade tensions, increased political risks or, potentially, a slowdown or deceleration of growth happening quicker, we would need to have a balanced approach in our portfolio,” the Hong Kong-based head of active investments for Asia-Pacific and chief investment officer of emerging markets for fundamental active equity said at a media briefing attended by our sister website Fund Selector Asia.
This year has been an unusual one for both global equities and bonds; both had negative returns despite strong earnings growth in companies, she added.
“Going back over 30 years, only twice have we ended the calendar year with both global equities and bonds in negative territory,” Boa explained.
A number of factors have led to market uncertainty: the slowdown in growth globally; the uncertainty around trade disputes; late-cycle concerns in the US; and tighter financial conditions.
“What we’ve seen, particularly when more volatility and uncertainty in markets are introduced, is investors tend to de-risk portfolios,” Boa said.
However, she said she believes a lot of these concerns, especially around trade disputes and increasing interest rates, have been priced-in to the markets.
“I believe 2019 will very much be determined by fewer rate rises, which could potentially be positive for risk assets,” she added.
Investors are advised to increase allocations to safe-haven assets, such as bonds, but at the same time have more risk assets, such as equities.
“We have moved from underweight to neutral on US treasuries, and we favour the short-end of the yield curve,” Boa said.
She added that the firm remains neutral on European and US credit because it prefers to take risk in other parts of the market, such as equities.
US and EM equities
Although global growth is expected to slow, Boa said she believes that a recession in the US is not imminent.
She also noted that growth in the US is much higher than for its developed market peers, so the firm favours US equities. “We believe the US will still offer double-digit earnings growth, which will sustain even though it will be at a lower level.”
Boa acknowledged that investors are concerned with US earnings going forward as the benefits from the tax cuts may dissipate next year. However, she also added that she believes US companies will continue to perform.
She said she also likes emerging market (EM) equities given their earnings expectations are also decent next year, albeit lower than in 2018.
Other fund managers, such as Schroders and T Rowe Price, also favour EM, citing very attractive valuations when compared with global markets.
Given that the US is expected to be in a late-cycle phase, Boa said she prefers high-quality companies that have strong free-cash flows, sustainable growth and clean balance sheets.
“Historically, they have provided a lot of resilience in the equity portfolio,” added Wenjie Lu, Blackrock’s China investment strategist. “These companies may not give us very exciting returns, but on a risk-adjusted basis they outperform during the late-cycle and even during an economic contraction.”
Japan and Europe
Turning to Japan, Boa said she is neutral overall. “Despite the fact we have seen some interesting macro data releases, we are still waiting for a catalyst to move our view on Japan. Q3 was relatively disappointing in terms of the GDP release, but we believe that was primarily caused by natural disasters.”
For Europe, Boa is negative for both the equities and fixed income landscapes. This is based on two risks the firm sees playing out in the region, both of which are driving uncertainty.
The first, she explained, is the political tension giving rising populism. “It seems to be across the board, whether it is the election results in Italy, the more recent protests in France and, of course, Brexit.”
Economic risks also loom in Europe, which is seeing zero growth.
“At the same time, unlike China and the US, which do have monetary policy and fiscal tools to support the economy, we don’t believe Europe is in the same type of position,” Boa added.
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