The world’s two biggest trading nations continue to clash over trade, but does the domestic backdrop in China and the US provide any grounds for optimism? Portfolio managers Charlie Awdry (Chinese equities) and Marc Pinto (US-focused Janus Henderson Balanced strategy) compare notes on the risks and opportunities they see for equities in 2020.
CA: Charlie Awdry
MP: Marc Pinto
What do you expect to see from your asset class as we head towards 2020?
MP: We have a constructive outlook for US equities in 2020. While the market environment is certainly changing, we see a lot of the themes that were in place for 2019 that are well positioned to make further progress. There are risks that we continue to focus on, with trade wars feeding through to geopolitical uncertainty, as well as the upcoming US election.
We believe that opportunities continue to outweigh the risks, but we need to be vigilant. If we see changes in the political environment that we think could impact our balanced multi-asset strategy, we would look to reduce our equity allocation, and increase our exposure to fixed income, in order to try and preserve capital, or if we fear that we could see more volatility in the market, because things can change pretty quickly. But right now, we continue to see a growing economy, supported by strong consumer spending, and potentially good returns for equities.
CA: A number of small rate cuts show that once again policy easing appears to be stepping up to offset the multi-year deleveraging driven slowdown. The political situation in Hong Kong is sad, worrying and unpredictable; however, we feel more positive about the market as policy becomes more accommodative and given that investor preference for higher-quality growth stocks is quite entrenched.
Do you see any substantive room for progress on US-Sino trade talks?
CA: There has been a lot of turbulence in equity markets in 2019, stemming from US-China trade friction. What started as a trade war has morphed into something bigger – China and the US are now essentially strategic competitors. But, and I am reading the tea leaves here somewhat, recent indicators seem to suggest a partial thawing of attitudes and a desire to achieve some sort of compromise based on the pragmatic answer of pushing more controversial issues out to next year and trying to agree on less contentious issues such as agricultural products. The wildcard here is how the US chooses to use the Hong Kong situation to antagonise China.
MP: The uncertainty related to the trade war with China affects US companies on a number of different fronts, including higher input costs, potential closing of export markets within China (particularly with regards to technology) and, in general, heavy industrial companies feeling the brunt of the dispute. Clearly, the market is very sensitive to any signs of progress or deterioration in talks. It is very much a fluid situation, where the market is poised to react to news breaking one way or the other. Despite this, the market has shown incredible resilience, helped by a really benign interest rate environment from the US Federal Reserve, which has created a very favourable risk/reward profile for equities versus bonds.
What do you see as the major trends in your primary market?
MP: Many of the world’s largest technology companies are based in the US and it has been one of the key growth engines for the world. The increasing digitisation of the economy, driven by technological innovation, is transforming business models nearly everywhere. We continue to see growth in ‘cloud’ spending, the shift to ‘Software as a Service’ (SaaS); as well as Content as a Service, though media streaming. We see ongoing expansion in e-payments, via the global transition to card from cash. Disruption is also hitting traditional industries, where many companies are using technology in new, innovative ways.
One lesson we have learned in the last couple of years is the importance of brand and consumer awareness. Companies with strong brands have been the real winners – with technology providing the bridge to go direct to the consumer, essentially bypassing the retail channel. Investors must understand what businesses are doing to adapt to this vast technological change, because digital disruption is the single biggest factor impacting company fundamentals.
CA: We see many of the same themes creating opportunities for investors across multiple industries in China. In the technology sector, as the most obvious example, the digital capabilities provided by large, powerful online platforms are transforming industries. Businesses like the local convenience store can integrate their inventory management with real-time purchasing data to guide decisions on which products to stock. China is at the leading edge in harnessing the internet of things (IoT), with everyday white goods like washing machines harnessing data on customer usage to help make better products. We are also seeing an explosion in the gaming industry, with the e-sports phenomenon attracting millions of viewers, and millions more going online to play or stream content from their favourite gamers. There are more than 2.5 billion gamers across the world, a market that is expected to generate more than $152 billion in product sales alone in 2019.
China’s population is rapidly aging as a result of the One Child Policy that has recently been reversed. The legacy of this policy poses challenges, such as higher dependency ratios, or rising labour costs as the workforce shrinks. However, it also provides investment opportunities – particularly for those businesses operating in the healthcare and pharmaceutical industries, as well as life insurance and other financial services.
More immediately, we see another interesting development in Chinese equity markets, namely that relatively cheap interest rate-sensitive and more cyclical stocks are responding positively to the prospect of further policy easing and an improving PMI manufacturing survey. Meanwhile many of the favoured, less economically sensitive growth stocks, particularly in the onshore A share markets, are really quite expensive after a long period of strong performance. We could be on the verge of some large rotation within the market.