Investors face new ‘cold war’ environment due to political tensions, says Eastspring

PUBLISHED : Wednesday, 19 April, 2017, 5:00pm
UPDATED : Wednesday, 19 April, 2017, 10:34pm

Investors need to proceed with caution as recent political tensions involving the US, the Middle East and North Korea have seen a return to an investment environment similar to the cold war era of the 1980s, according to Eastspring, one of Asia’s largest fund companies.

Eastspring Investment, part of UK insurance giant Prudential which manages US$140 billion in funds, described the current investor sentiment as one of “Back to the Future” because today’s political tensions resemble a return to the cold war period of the 1980s when the US and western Europe had tense relationships with the Soviet Union and Eastern Europe.

“We are in a post-post-cold war environment where we are going to see investment markets worldwide affected by many politically related volatilities. Huge liquidity will continue to support the markets in Asia, US and Europe but we are going to see a lot of ‘air pocket’ events that may shock the markets,” said Virginie Maisonneuve, Eastspring’s chief investment officer.

We are in a post-post-cold war environment where we are going to see investment markets worldwide affected by many politically related volatilities
Virginie Maisonneuve, Eastspring’s chief investment officer

Asian stock markets fell sharply on Friday while the yen and gold hit five-month highs as investor fears grew after the US dropped the largest non-nuclear bomb ever used in combat on Afghanistan on Thursday night.

On Sunday North Korea test fired another missile, but it exploded seconds after launch. The launch was seen as a test of the resolve of US president Donald Trump who has vowed to stop North Korea’s nuclear programme, with or without China’s help.

In addition, Maisonneuve said the upcoming presidential elections in France and other European countries also add to uncertainties.

“We have to hold certain bonds and fixed income investments despite the fact that interest rates are on a rising trend,” she said.

However, Maisonneuve is still positive on stock markets, particularly Asia and emerging markets over the long term.

“I don’t think it is time to sell your portfolio. It isn’t wise to hold 100 per cent cash. I believe in investing in stocks and bonds in emerging markets as many of them are trading very cheaply including the H-shares in Hong Kong,” she said.

Based on its 2018 earning forecast, European stocks are trading at 14 times PE ratio, higher than 13 times in Hong Kong and 12 times in Asia excluding Japan, according to Ken Wong Ka-kuen, chief portfolio manager for Asian equities at Eastspring Investments.

“Despite the Hang Seng Index having risen 10 per cent in the first quarter, our firm believes the local stock market still has room to go higher this year as the Chinese economy has showed a recovery. Mainland China on Monday reported its gross domestic product rose 6.9 per cent, higher than the 6.5 per cent full year target,” Wong said.

Maisonneuve picks consumer, technology and millennials as the major investment themes in the coming years.

In both Asia and Africa, retailers and technology firms will benefit from trends that include more people shopping online and increasing use of artificial intelligence to cut costs and improve productivity.

The millennial population, referring to those between the ages of 18 to 35, have reached 1.8 billion worldwide with 58 per cent of them living in Asia.

“The millennials are going to receive the largest wealth transfer from their parents and grandparents. They have different attitudes, different tastes, and different opinions on many issues compared with the previous generations. This will provide new opportunities and challenges for many companies but they need to analyse them case by case to pick the winners,” she said.