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GAM Talks Q3 2019: Why should investors consider your asset class?

11 July 2019

We asked a group of our portfolio managers a series of questions about their respective asset classes. This first video, in a series of three, examines why investors should consider their asset class.

Q1: Why should investors consider your asset class?

Jian Shi Cortesi on Asia and China Growth Equities

Because of the trade war, last year saw Asian equities come down by about 25% from the peak while Chinese equities came down 35%, and now we believe some single stocks are trading at or close to the lowest valuations they have been in the last 10 years. If we look back in history, every crisis or big macro episode actually created an opportunity for people to buy into Asia and China; that includes the global financial crisis in 2008, the 2011 eurozone crisis, the 2015 Chinese yuan depreciation fears and the trade war which started last year. We have already seen a rebound in Asian and Chinese equities at the beginning of the year, but they came down again May offering another opportunity for investors to buy into them at bargain prices.

Patrick Smouha on Developed Market Credit

For many years we have been focused on financial institutions. The reason is because since the global financial crisis, the regulators did not want to repeat the situation where governments had to step in and rescue the banks, so they forced banks to deleverage and build up capital. We have been seeing this over the last few years. Essentially, we have seen all the banks significantly increase their capital ratios, deleverage and become structurally safer. This means as credit investors we feel very comfortable because we are investing in bonds with companies who have to structurally become safer; from that perspective we believe we are in a very strong position.

Tom Mansley on Mortgage Backed Securities

The mortgage-backed securities market is very large. It is over USD 8 trillion in size and that actually makes it larger than the corporate bond market [in the US]. There are more mortgage-backed securities in existence than there are corporate bonds so it is very large, it is very liquid, and it is also very deep and broad. There are a number of return profiles that we can invest in, particularly right now when credit is so good. That opens up an entire space of credit in order to achieve excellent returns.

Swetha Ramachandran on Luxury Equities

I think what is interesting about the luxury industry at the moment is a combination of different factors that are really conspiring to drive demand to very high levels. First of this is the continued development of the emerging middle class. Every second five people are estimated to join the global middle class, and the majority of these are from Asia; predominantly China and India. What we know about consumers in China and India is that they also tend to be younger and have a higher propensity to spend. So millennials and Generation Z are driving a huge explosion in demand for the luxury industry. Combined with this we have digitisation, which is obviously affecting all industries. Luxury is a little bit slow to this, but definitely the acceleration driven by a younger consumer is there and that drives a lot of demand for luxury brands that are able to tap into this growing trend.

Tim Love on Emerging Market Equities

I think the answer lies in three areas: valuations, liquidity and risk / return. With regard to valuations, whether an investor is considering investment grade value, growth or yield in global markets they will find themselves attracted to emerging market (EM) equities at this juncture relative to developed world alternatives. In that regard, if any of the above was to find the dividend yield, the earnings yield or the free cash flow yield of EMs (at three or approximately 10 respectively) then I think it would be difficult to mimic the same return in developed worlds. Liquidity is the second point. If the EM equities universe was the size of your business card, EM credit and EM bonds and EM currency flows would be the size of an A4 or an A5 piece of paper. So by definition the probability, and indeed the size of the impact of crossover flows from the former into the latter, would have a disproportionately large effect on the upside. The third point is risk / return. If I am even half right on that, the fear of missing out will be large, the Sharpe ratio will be doubly blessed as volatility declines and earnings come through.

Gianmarco Mondani on European Non-Directional Equities 

I think equity and bond markets appear very risky right now. They have been going up a lot year-to-date, but economic statistics have been deteriorating across the globe, earnings are slowing, and I think equities have really rallied principally because of lack of yields within the fixed income space.  But if equities are bought as a replacement to bonds, one should expect returns to be quite limited from the asset class, the same as you would expect from a coupon and bonds. There are also ongoing risks of sharp selloffs reflecting the trade tensions between China and the US and Brexit , which do not appear to be anywhere close to being solved. In this context, a strategy that is able to produce positive returns in all market conditions should be an essential tool for asset allocators.

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. Reference to a security is not a recommendation to buy or sell that security. Past performance is no indicator for the current or future development.

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