While China and Europe are being blown around by big headwinds, markets in Asean are standing firm, says Fidelity International.
“Indonesia, along with the wider Asean region, offers real solace away from some of the bigger wins that are now buffeted by global headwinds,” says Matthew Quaife, head of multi-asset investment management, Asia at Fidelity International.
“If you think about it, China, Europe [and] areas of tech, all of these are being blown around by the big headwinds, whereas an area like Asean — with Indonesia, Malaysia and Singapore — they’re nicely balanced to the world,” says Quaife.
The region’s economies are “not hugely exposed to commodities in a positive or negative way”, Quaife adds. “They’re cheap [and] they’re exposed to tourism opening up, which will continue there. So, it’s an area of the world that we really think [could] recover some of the valuation that was lost through the pandemic.”
Speaking at Fidelity’s Global Macro and Investment Outlook on April 26, Quaife says the fortunes of the West are diverging from those of the emerging markets.
“Persistently high and broadening inflation remains one of the stiffest economic headwinds confronting the US, Europe and several other major economies. But so far, for most of Asia, the picture has been rather different. We see increasing value in emerging markets and Asia Pacific to invest for income,” he says.
See also: Unveiling value opportunities in energy, healthcare and technology
Overall, Quaife takes a cautious view on risk assets and remains underweight on equities and credit. “On the equity side, we’re keeping away from the areas most sensitive to trade and some of the geopolitical risk at the moment.”
Across regions, Quaife is overweight on the US as a “safe haven”, which is more insulated from global geopolitical tensions and energy supply risks.
Conversely, he has become underweight on Japan, citing deteriorating terms of trade and earnings revisions. Similarly, he remains underweight on Europe on recession risks.
See also: Time to rethink traditional thinking in emerging markets
Staying secure in themes
The world is changing quite a bit, says Quaife in a broad understatement of current affairs. Inflation, even excluding commodities, is at multi-decade highs.
He cites oil prices as a bellwether for global instability. “There’s going to be a number of elements, and it’s very hard to predict what the oil price is going to be over the next two or three weeks. Policies can change it, it’s very binary, whether we’re going to get some significant spikes and energy sanctions and as such, it’s very hard to predict over a few weeks.”
Instead of chasing short-term gains, Quaife promotes medium-term themes that will soon develop from today’s events.
One of them, he believes, is cybersecurity. “The geopolitical conflict is going to cause corporates to really think: ‘Am I safe? Have I got the right infrastructure in place to keep my cyber networks working and my activities going?’ That’s similar also on a personal level. It’s an area of growth; equities that are sold off offer a really good entry angle and we can take advantage of it,” says Quaife.
Renewable energy is another theme Quaife has set his sights on, especially as Russia turns off the taps on natural gas to the rest of Europe. “There’s going to be a huge doubling down of renewable energy in the likes of Europe. You can take advantage of that too.”
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He adds: “There are these elements that we can invest in, away from the big asset classes, that can really pay off.”
Give A-shares six months
As Europe watches the war on Ukrainian soil, China is grappling with the fallout of its own crises at home. A slowdown is widely expected as China imposes abrupt lockdowns to deal with the pandemic its way.
In the short term, the fundamentals do not look great, warns Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.
He says: “While uncertainties remain for China, there are signs of constructive policy developments and financing conditions becoming more favourable, which should make for a better environment as we turn the corner into the latter part of the year. However, near-term macro volatility remains elevated due to the zero-Covid-19 policy.”
Over the medium term, however, China “probably offers one of the best opportunities in certain areas”, says Quaife. “If you look at some of the tech stocks, they are fantastic companies. The valuations they’re now trading at are quite remarkable compared to the West.”
Quaife sees “a big flashing green light” on valuation of these companies. “It’s a bit like a 2008 valuation where in order for that high yield to be justified, an awful lot would have to go wrong, [for example,] in terms of regulation, heavy sanctions and a complete rewriting of the growth story in China. I just don’t think we see that.”
For now, the fundamentals may not look great, says Quaife, a problem exacerbated by the Covid-19 lockdowns in Shanghai. “Sentiment is incredibly suppressed… There’s a real fear in the markets. The best time to buy is usually the most uncomfortable time to buy and I think we’re pretty close to that. But the next two, three months are not going to be easy.”
While Chinese citizens remain spooked about the threat of lockdowns, rebuilding their confidence will be crucial, says Quaife. “Foreign ownership of A-shares still remains pretty low. So really, it’s about the domestic markets and that turnaround, which is the elephant in the room. We can have lots of charts [about market rebound] but ultimately, it will be when the confidence comes back into the market.”
Quaife reckons this return to form will take no more than a year. “I think what you’ll get in the coming months is a bottoming out in China, and then a bounce-back. They will get on top of this at some juncture in the next six to 12 months. The valuations that I talked about will be realised and we will get quite a strong bounceback in all likelihood.”
