How Asian investors can navigate the trade war

China-US trade tensions are set to persist so investors should look for long-term opportunities in sectors like e-commerce and cloud computing

The much-hyped meeting between the leaders of China and the US at the recent G20 summit turned out to be a non-event.

While there was a fleeting easing of trade tensions, anxious investors across the region are still hunting for safe shelters in what continue to be unpredictable markets.

But the trade conflict is only a symptom of a greater malaise between the world’s two largest economies.

Even if the pair announces a deal in the near future, that agreement will also pass as the fundamental issues that exist between them will inevitably resurface.

Asian investors therefore must accept that the China-US friction will be an ongoing scenario and adjust their mindset to embrace future trends that can insulate them from the present defective investment climate.   

DBS Chief Investment Officer (CIO), Hou Wey Fook, recently told The Asset how investors can look beyond the current market apprehension by capitalizing on long-term game-changing trends.

Hou advocates the use of a carefully calibrated Barbell Strategy, with growth assets on one end and income assets at the other.

According to Hou, long-term strategic changes are emerging with Asia at the core that will have a profound impact, meaning it will no longer just be business as usual.

As familiar business models unravel or face obsolescence, the CIO recommends stripping away sectors that are under siege from disruption and buying into companies plugged into the secular growth themes, alongside holding income-generating assets.

Among the secular themes he is recommending investors turn to for growth are companies tied to millennial consumption, e-commerce, cloud computing, automation, equities with exposure to US technology, Chinese A shares, and those that embrace the sustainability agenda.

While on the “Income” side of the equation, the balance consists of REITs, dividend stocks, and BBB/BB corporate bonds.

“Even though Singapore REITs have achieved a total return of 18% year-to-date, we continue to find them attractive as their dividend yield is averaging 5% in the face of very low and declining rates globally,” says Hou.

“We like the BB/BBB-rated segment of the bond market as their yield is the highest compared to A-rated and above credits. Given the level of rates today, we are sanguine about corporates’ ability to service their loans. Hence the default rate is not expected to rise above historical norms,” he adds. 

On automation, the CIO says “If you look at China today, the workers between the ages of 20 to 60 have peaked out and therefore they need to embrace robots and smart factories. The robot density today in China is only 1% so we can see the potential.”

Hou also sees environmental, social, and governance (ESG) investments as no longer being a niche category of investments. “Instead, it will be a mainstream investment category and part of core portfolios,” adds Hou.

The changes have already begun due to two factors: the push factor of increased client demand and the pull factor of ESG adding value to credit analysis.

At the institutional level, the world’s leading sovereign wealth funds are allocating hundreds of billions of dollars to ESG funds and investing in companies who effectively incorporate ESG and sustainability into their business.

The prime example is the world’s largest wealth fund. Norway’s US$1 trillion fund fired a warning last year to companies it invests in to adhere to more demanding guidelines on ocean pollution and sustainability.  

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Date

11 Jul 2019

Channel

Capital Markets

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