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Weekly Manager Views

31 January 2020

At GAM Investments’ Weekly Investment Meeting held on 29 January, the speakers were Jian Shi Cortesi, who commented on the economic ramifications of coronavirus, and Tim Love who shared his views on emerging market equities.

Chinese and Asian equities

Jian Shi Cortesi

  • Looking at the stock market today, we believe that Asia and China valuations are quite moderate, with Asia ex Japan equity trading at a 30% discount compared to the US in terms of price-to-earnings ratio. Asian currencies are also at very low levels, not far from the bottom seen during the global financial crisis. Moreover, domestic policies in Asian countries have become very supportive to economic growth, the Federal Reserve has entered into an interest rate easing cycle and trade war concerns have been eased give the phase one trade agreement has been signed between China and the US. These are all very positive catalysts, in our view, to trigger positive performance for Asian and Chinese equities.

  • However, a significant negative to this market optimism is the coronavirus. While the detail around this outbreak is still emerging, data currently suggests it is less fatal than previous viruses, with an estimated death rate of between 1-4%. This compares with MERS and SARS which had a 30% and 10% death rate, respectively. At present, we believe it will have a short-term negative impact on Chinese GDP in Q1 and Q2, reflecting emerging measures in place restricting the movement of people. However, we expect the economy will likely rebound to normal levels once fear has subsided. Based on previous virus episodes, we can estimate that the market will likely bottom after the number of new cases peaks.

  • While the virus remains active, we believe that companies related to travel or offline entertainment (such as casinos or cinemas) will see their revenues adversely affected. Conversely, online companies may reap the benefits, as residents are staying at home and are therefore likely to spend more time on their phones and laptops. Ultimately, we feel the virus should not affect a company’s ability to generate earnings in the long term.

  • While acknowledging the human tragedy of these events, such market dislocations can present opportunities from an investment perspective. As has been seen previously, we anticipate a V-shaped market movement – a sharp decline followed by a rapid recovery – as was seen during SARS in 2003. These moves tend to be driven by investor behaviour reacting to such times of uncertainty, rather than being based on any fundamentals, and therefore they suggest that pricing anomalies will occur.

  • Overall, our core themes continue to focus on consumer and innovation – both of which are unlikely to experience any long-term impact from the virus.

Emerging market equities

Tim Love

  • This has clearly been an extremely challenging start to the year for emerging market (EM) equities, which have sold off sharply on the back of concerns about a potential escalation in the coronavirus outbreak. Ever since SARS broke out in 2002/3, we have been cautioning that ‘black swan’ events might prove the biggest risk to the asset class. It is too early to assess whether the current situation in China will prove to be a ‘black swan’, as we discussed in our recent note on the coronavirus and, therefore, we think it best to keep liquid and vigilant and to think medium to long term.

  • With this in mind, we reiterate our long-held view that focusing on capturing upside potential is key when considering EM equities, while also avoiding too much exposure to the downside. Our overall approach is style agnostic. Rather than favouring either growth or value styles, we seek to buy high quality stocks at attractive valuations, within the context of a robust risk management framework. Diversification (at the country, sector and stock level) is a key risk mitigant – as are disciplined portfolio construction and risk management.

  • Liquidity is particularly critical in a risk off environment as we believe it is important to be able to exit positions quickly if needed. With this in mind, we favour higher quality holdings (in terms of free cash flow and working capital) and strictly limit our allocations to less liquid frontier market investments. We are firmly focused on fundamentals, valuations and the risk / return logic for buying this asset class.

  • Even before the onset of the coronavirus, the MSCI EM index was trading substantially below its 2007 peak and stocks are currently attractively valued. On a relative basis, EM equities have been in the wilderness for the last 12 years. They made strong gains in late 2019, but we believe this was only the first leg of a medium- to long-term recovery. As already outlined, we think it is essential to capture the upside (as well as aiming to deliver downside insulation) so we need to be positioned for rebounds from troughs.

  • We often refer to the EM equity universe as being the last remaining ‘investment grade laggard’ given that eight of the top 10 EMs are now investment grade. Since EM equities have substantially underperformed the equivalent sovereign bond markets, we expect to see liquidity inflows from crossover investors and those seeking positive carry trades.

  • In our view, EM stocks are well positioned in terms of the structure and robustness of their balance sheets and appear to offer compelling appeal to value, growth and ‘search for yield’ investors.

Important legal information
Source: GAM unless otherwise stated. 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. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or advice. Reference to a security is not a recommendation to buy or sell that security.
January 2020