Key points
Corrections can indicate a repricing of excessive optimism
Fixed income assets remain a diversifier of portfolio risk
Are you considering to invest into fixed income or equities at this point? Hear from Lion Global Investors and J.P. Morgan Asset Management on what they think about the opportunities in fixed income and China equities.
Opportunities in fixed income by Lion Global Investors
Key points
Corrections can indicate a repricing of excessive optimism
Fixed income assets remain a diversifier of portfolio risk
Overall outlook
Investors seeking to manage currency risk should consider SGD-hedged classes of fixed income funds. In terms of assets, Asian bonds will likely generate modest and positive returns for the year.
Opportunities in China by J.P. Morgan Asset Management
After the strong performance in 2017, should we still remain optimistic on China this year?
Can China counter the push by the US on protectionism?
Yes, and this has already started to some extent. In early February, China has launched an anti-dumping investigation into sorghum (used to feed livestock) from the US. China is US’s top importer of this product, alongside with soybean. As we would expect, the trade tension is likely to focus on specific products or sectors, instead of a blanket tariff on all Chinese/American products.
What are your views on the Renminbi (RMB)?
Despite the sharp appreciation against the U.S. dollar, the Chinese renminbi has remained relatively stable against the China Foreign Exchange Trade System’s (CFETS) trade-weighted basket. Composed of 24 currencies, the CFETS index is only up by 0.4% this year, and the index level has remained within the 93 - 95 range for half a year. This divergence between the Chinese renminbi’s performance versus the U.S. dollar and versus the CFETS index reflects the People’s Bank of China’s (PBoC) matrix of goals for its exchange rate policy.
The PBoC’s primary goal for the currency is for it to support Chinese export sectors by maintaining a relatively competitive exchange rate. Therefore, the central bank anchors the Chinese renminbi to the CFETS basket, which measures the overall competitiveness of the renminbi against the currencies of China’s major trading partners. The second goal is to limit capital outflows and correspondingly, to curb expectations for a weaker currency. A situation complicated by the Federal Reserve’s tightening policy and ongoing trade tensions between the U.S. and China. If the USD index continues to trend downward, the PBoC could achieve the above goals by consolidating the CFETS pegging and allowing Chinese renminbi appreciate further against the U.S. dollar. The central bank could be comfortable with a strong USD/CNY rate, so long as Chinese exports also remain strong. However, policy makers are cautious about strong expectations for a one-way currency move, which could raise the chances of speculative capital flows and asset bubbles. The authority might allow wider two-way volatility in the foreign exchange market to deter such bets. The suspension of the CCF, in our view, is the precursor for such manipulations. Meanwhile, the PBoC will continue to closely monitor any currency moves and maintain a high degree of control over cross-border capital flows. Continuing capital controls offers more flexibility to the PBoC in its domestic policies and a wider exchange rate band could shake out some of the speculative positions, collectively strengthening the PBoC’s hand in engineering the economic outcome it wants.
Do you anticipate China’s growth rate meeting the target that the government has communicated?
Market consensus is for China’s economic growth to meet with the government’s expected target of 6.5% and we agree. The government is focusing on de-risking the financial sector with greater scrutiny on bank lending, shadow banking system and wealth management products. This could bring economic growth down from 2017’s 6.9% but Beijing is unlikely to tolerate too much of a deceleration. Consumption is taking over as the largest driver to economic growth in China and rising income and access to financing implies consumption growth is likely to remain strong. Meanwhile, global trade cycle improving should also help to support exports, despite a stronger renminbi.
What are the key risks on the horizon for the A-shares market?
There are well flagged risks around economic slowdown and the effect that would have on the banking system. Perhaps less well understood by global investors is the extent to which onshore market sentiment remains somewhat cautious due to the financial regulatory changes implemented by the PBOC and the three financial regulators. This could hold back investors deploying capital investing in A shares. Further, the risk of less accommodative regulation is one of the challenges which could emerge for the tech and internet giants which did exceptionally well last year and which are prominent in many portfolios.
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