Investors must toe the line between defensive, sustainable yield names and dividend growth cyclical names into 2019, says Sat Duhra, Asian dividend income strategy portfolio manager.
What are the key themes likely to shape markets in 2019?
There can be little doubt that the US-China relationship will be somewhere near the top of the list of themes likely to shape 2019. The better description of the current tussle is an ‘economic war’ rather than ‘trade war’ as the key issue underlying the strained relationship is not trade but China’s economic rise and the threat that poses to US corporates. The tug of war between the two countries will continue for years to come.
In addition to this we should expect geopolitical risks to remain elevated with issues such as North Korea, Iran and Saudi Arabia some examples where tensions could boil over and create further volatility, not to mention EU political risk and other populist political uprisings.
China, as usual will remain a key theme for global markets. The response from China, in particular, to the current environment will be key for Asian investors as a steady flow of monetary and fiscal easing provides some support for a stock market that has decoupled from robust corporate earnings and resilient macro-economic data.
Where do you see the most important opportunities and risks within your asset class?
Rising bond yields and cash rates are traditionally negative for ‘bond-proxy’ type names within an income strategy and remain key risks but it is also operational hiccups at traditional yielding safe havens such as telcos that has forced investors to look elsewhere for yield. The strategy has successfully switched focus to domestic cyclicals such as consumer, materials and energy capturing rising earnings in Asia without compromising the overall yield of the strategy. The current environment continues to suggest that income investors will be rewarded for selecting more cyclical yields at the expensive of weakening ‘bond-proxy’ type names.
How have your experiences in 2018 shifted your approach or outlook for 2019?
In many aspects 2018 has been frustrating for Asian investors given that Asia continues to be lumped together with other ex-Asia EM markets and is being hit with a similar risk premium. At a political, economic and corporate performance level there is a massive gulf between Asia and non-Asia EM, but there remains risk for Asia into 2019 as issues in the likes of Turkey, Brazil and Argentina are some way from resolution. This will require a fine balance between defensive sustainable yield names and dividend growth cyclical names into 2019.
Another significant development in 2018 was the rotation away from high growth sectors such as technology which had completely departed from any fundamental valuation sense, ‘value’ type names were the beneficiary of this sharp sell-down. As we head into 2019 we are making some cautious steps back into more cyclical sectors as the chances of a China rebound from depressed valuations and improving US relationship could lead to further rotation back to select cyclical names.
Which themes have the potential to redirect markets in 2019? Download our one-pager summary to find out
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