Trade, political tensions 'remain uncertainties in H2'

Singapore

HEIGHTENED trade and geopolitical tensions have dimmed the near-term outlook for the global economy, despite an increasingly accommodative stance from central banks (including the US Federal Reserve) and little signs of financial imbalances, BlackRock has said.

Given such an investment climate, the asset manager has reduced risk across its portfolios and turned to positioning them more defensively, not only in Asia and emerging markets, but globally.

Belinda Boa, BlackRock's head of active investments for the Asia-Pacific, speaking at its mid-year investment outlook for Asia, said last week: "We see rising geopolitical tensions surpassing Fed policy as the lead driver of global financial markets near term."

Meanwhile, BlackRock's head of global emerging markets equities Andrew Swan said: "In our equity portfolios, we have raised cash levels, reduced exposure to technology companies, given potential vulnerabilities and increased exposure to defensive areas, such as utilities, healthcare and telecom."

The asset manager's head of Asian credit Neeraj Seth added: "On the credit side, we have also reduced overall risk and moved up in quality across investment-grade credits as well as high yield. We focus primarily on bigger businesses that tend to be more resilient to changes in economic conditions and offer more predictable and stable cash flows."

Over the weekend, the US and China leaders met on the sidelines of the G20 summit in Osaka. The meeting met expectations of a truce in that no further tariffs were placed on Chinese imports and that business has resumed between US companies and Huawei Technologies.

The successful meeting eases tensions in the near-term, but observers have noted that a deal could still be a long way from home and the relationship between the two, unpredictable.

While it is still unclear whether earlier tariffs would be cut by the Trump administration, Mr Swan said that the US president may soften his stance on China "if recently imposed tariffs show themselves to be taking a toll on US consumers and economic growth".

The broader concern, Ms Boa acknowledged, is that bilateral trust between both parties may restrain or even reverse the globalisation trend of past decades.

As it stands, corporates have already moved towards redrawing global supply chains in anticipation of further tariffs on Chinese imports to the US, which BlackRock believes has been partially reflected in Asian financial markets.

The relationship between the US and China has weighed on the geopolitical environment and impacted growth, which, Mr Swan noted, may give the impression that the region is exhibiting late-cycle characteristics, even though Asia is very much in the mid-cycle.

"If we look at outlook for profit growth in the region, we see a subdued environment," he said, adding that Asia is currently facing a slower growth after a "high accelerating environment since early 2016".

With the uncertainty brought by the trade war and slower growth prospects, BlackRock has scaled down on its previous overweight position on Chinese equities to neutral.

That said, its head of Asian credit Neeraj Seth noted that with the Fed adopting a dovish stance, the People's Bank of China (PBOC) has more room "to take a neutral or more accommodative stance, which can be taken through liquity injections or reserve requirement ratio (RRR) cuts".

The Chinese government has already indicated that it will introduce fiscal stimulus to drive growth in the cooling economy.

From BlackRock's perspective, with regional central banks taking more accommodative stances, policy moves in Asia are a positive. Growth trajectory remains acceptable but geopolitics remains the unknown.

Even though the US-China relationship remains a key driver of the markets in the near-term, BlackRock said it may serve as a catalyst for broader reform, self-reliance and stronger intra-regional ties.

This supports the asset manager's longer-term conviction in the Asia-Pacific. Mr Seth said that the longer-term outlook for Asian risk assets "remains constructive, underscored by the region's deep commitment to reform as evidenced by recent elections in India and Indonesia".

The above-mentioned markets, where pro-business governments were recently re-elected, are also the two in Asia that BlackRock is most bullish about in the second half.

Mr Seth said: "We recognise that India's growth may face downward risks near term, but we believe the foundation is largely in place, and the challenge now is in executing [plans] effectively."

India also stands to benefit from trade diversion and redistribution of global supply chains emanating from the trade dispute.

But the effect on India may be less pronounced that that on South-east Asian countries like Vietnam, Thailand and Malaysia, which have a better track record of attracting foreign direct investment.