While the fundamentals for Asian equities remain solid, US protectionism and a strengthening of the US dollar has made the mid-year economic outlook for Asia investments unclear, according to head of Asian and global emerging markets (EM) equities at BlackRock, Andrew Swan.
According to FE Analytics, the first half of 2018 saw the MSCI AC Asia Pacific Index return 3.78 per cent while the MSCI AC World Index returned 6.57 per cent.
Swan noted while equity markets plummeted in late January, the first quarter of 2018 saw strong growth in the Asia market, despite the pace moderating more recently.
The chart below shows the MSCI AC Asia Pacific Index against the MSCI World Index.
Swan said a lack of policy visibility, especially US trade policy, had unnerved investors and corporate management teams.
“The heightened uncertainty has limited upside potential for stocks that would have otherwise risen purely based on fundamentals,” he said. “We are watching this closely and will adjust the portfolios if necessary.”
Swan named US protectionism and the strengthening US dollar as clear risks, adding that EM and Asian currencies had “come off their highs” from earlier in the year, and equities had underperformed developed market counterparts recently.
“Higher US interest rates make high-yielding EM and Asian assets relatively less attractive,” he said, adding that this was the reason for the strong US dollar. “A strong dollar usually spells trouble for EM, in part because it makes servicing external debt more expensive for EM borrowers.”
As reliance on dollar financing is significantly lower in Asia than other parts of the world, BlackRock had only made marginal adjustments to their portfolios, which remained positioned for their base case of a better growth environment.
They maintained overweight positions in energy, materials and financials, and have been increasing their position in industrials as Asia exits its capex strike.
“Our view has been that as growth begins to pick up, companies will begin to use high cash balances to reinvest in their businesses,” he said. “This is what we are seeing. We are coming out of this capex strike, but the positive sentiment of companies has yet to be echoed in the equity markets.”
