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GAM Talks: What are the main risks for your asset class?

We asked a group of our fund managers a series of questions regarding their respective asset classes. This second video looks at the current risks across European value equities, emerging market equities, luxury brands, Japanese equities and local emerging market debt.

04 October 2018

Part 2: What are the main risks for your asset class?

Hans Ulrich Jost on European Equity Value

I think the risks are not specific to my asset class, ie eurozone value, but more related to equities or any risk category in general. What is currently being priced in by the market, ie the next systemic crisis, with Japan-style deflation for the next 30 years, is basically being reflected by bonds and financials, anticipating the next recession, which is three to four years off. So what is being priced in by the market is these geopolitical worries. But what does concern us is should we get back to the posturing of Trump / Kim Jung Un that we had around six to nine months ago, that becomes completely unpredictable in the whole equation. And obviously if such an escalation were to happen, should we to go into a third world war, it is something that would obviously be very much to the detriment of any risk asset category. But in terms of economics, and geopolitics, what is currently priced in cannot happen, so there is only upside.

Tim Love on Emerging Market Equity

Risks. Emerging markets are synonymous with risks. Three types of risks come to mind: global risks, home-grown / domestic risks and other one-off risks. I think we can navigate our way through the global risks: steeper yield curves, US dollar up, the positive carry trade, money running away, crossover, people exploiting the asset class for a temporary tactical call and then withdrawing immediately and causing a liquidity downdraft. The second point is the domestic / home goals. These risks can be exacerbated at a time where we do not need to do so through election cycles – for example in Latin America, where the Brazilian election cycle is getting into its 11th hour in late October and in January when Mexican president elect Andrés Manuel López Obrador takes up the reins. These are both areas of potential reform risk. Reform itself is another risk, where these measures might be repealed or rolled back - Greece is a good example, potentially. The third group would be what I would call one-off risks. Sanctions on Russia is a good example – do we need to take that extra risk in the search for high-quality growth stocks within Russia? On a top-down basis, the country looks extremely attractive with dollar debt and international exposure remarkably lower than it was historically and with enough international reserves to cover all. So why can I not go into Russia now? I can, but you have to measure the risk of the sanctions. On top of that you have other risks which could manifest themselves from left field. Disease is an example here. An outbreak of ebola in the Congo or indeed in parts of Africa where war might complicate the World Health Organisation’s response. And then you have a SARS 2 scenario, which when it happened in the past was as brutal as the Asian financial crisis. So in aggregate, risks are there, but do not forget the investment grade status and, indeed, the more resilient profile of emerging markets and the fact the asset class has not really run.

Scilla Huang Sun on Luxury Brands

The main risks for investing in luxury stocks are the usual ones relating to equity investing, ie overall equity volatility. But specifically for the luxury sector you can have further short-term volatility on the back of bad or negative geopolitical headlines relating to topics such as trade issues or China. In the past, however, these have proven to be the best moments to add positions because the underlying trend is actually quite robust. Furthermore, it is important to note that luxury brands are not only cyclical sub-sectors, but there is also exposure to more defensive areas like cosmetics or beverages, ie spirits, cognac and champagne.

Ernst Glanzmann on Japanese equity

The main risk for Japan comes from external issues rather than from internal ones. We have seen some quite interesting correlation analysis on this. Over the last 15 years or so the correlation of Japanese equity prices with the world equity market has been increasing and is higher today. Yet, if you perform the same analysis on an earnings per share level, the correlation is extremely low. This difference, in my experience, is because people would rather follow the news flow from the US and major issues happening outside Japan; this is having a major influence on the price setting for the Japanese equity market. Another risk is the trade disputes. If the US becomes more forceful towards Japan regarding changing trade patterns, it means the Japanese would have to buy more US goods. I think the market has not yet factored this in and it could have a negative impact over the short term. Another issue could be that next year the Japanese government intends to hike the consumption tax from 8% to 10%. This could have a major impact on private consumption, and obviously the market has not yet factored this in either.

Paul McNamara on Local Emerging Market Debt

I think the main risks are really what have held the asset class back so far this year. When the US dollar is strong against major markets it tends to be very strong against EM and that has been exactly the pattern we have seen so far this year as the market has been focused on very good growth out of the US and really failed to notice that the rest of the world is ticking over quite nicely. That is the environment that tends to mean a strong dollar and emerging currencies always struggle against a strong dollar.

Important legal information

The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Allocations and holdings are subject to change.