Investors have ignored risk and a December rate hike by the Federal Reserve will usher in a period of increased volatility, according to Victor Rodriguez, head of Asia Pacific Fixed Income at Aberdeen Asset Management (‘Aberdeen’).
But Singapore-based Rodriguez, speaking at Aberdeen’s 2016 Outlook roadshow, ‘The Time for Reckoning’, said that volatility would lead to buying opportunities as markets would overshoot.
Rodriguez argued that US policy had been too tied to markets, describing Quantitative Easing as a ‘sleep potion’ that had flattened corporate bond yield spreads and led to widespread mispricing of assets.
Once the Fed acts he anticipates more focus on the pace of economic growth rather than its direction. Rodriguez also predicts US interest rates will be higher than the market forecasts in 12 months’ time, based on steady recovery in jobs.
He cites the importance of cheap oil, which has had the effect of suppressing inflation, even as growth returns. The supply overhang means this cost windfall is likely to last. Still, the US economy remains interest rate sensitive given high debt levels, which may be a constraint later.
Aberdeen’s Asian-based managers are also cautious. According to Kenneth Akintewe, Senior Investment Manager, Fixed Income, Asia is in reasonably good shape to weather another ‘taper tantrum’, although the strong dollar persists.
Recalling the ‘Fragile Five’, he says the lumping of India with other indebted emerging market nations meant many investors missed the robust policy framework that ensured that country has been a standout bond market performer.
A similar over-reaction in the high-yield market could offer a buying opportunity, he suggests.
For James Thom, Senior Investment Manager, on Aberdeen’s Asian equity desk, earnings headwinds will be the single biggest brake on share prices next year. But the flip side to this is that companies are managing balance sheets better and returning surplus cash to shareholders.
While the Asian consumer story has been a popular one for investors of late, resulting in steep valuations for the sector, a less remarked upon one is the shrinking public sector.
In India state-owned banks have run into trouble over bad debts, enabling the private sector to take market share, according to Thom. In China, pockets of growth in the private sector exist within a slowing economy.
Victor Rodriguez, Head of Asia Pacific Fixed Income, summarises:
“The outlook for the global economy is mixed. While our base case is for a US rate rise, a strong dollar and falling trade are potential obstacles to a recovery. We expect benchmark US Treasury bonds to struggle and equity returns to be muted given weak profit growth. Company fundamentals will therefore become more important. Active investors should be able to take advantage of an expected increase in volatility and any valuation disparities, with emerging markets now at a significant discount to developed ones. But much will come back to currencies, as they are a conduit for how investors are seeing risks.”
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