Federal Reserve

It’s time to go long on China, Japan and rest of Asia, investment strategist says

PUBLISHED : Monday, 13 March, 2017, 8:02pm
UPDATED : Monday, 13 March, 2017, 10:56pm

The greenback and US equities appear overvalued and investors should turn to China, Japan, and other Asian markets, amid improving prospects for the region, according to a top global asset management company.

Luca Paolini, chief strategist for Geneva-based Pictet Asset Management, said that investors should consider reducing positions in US equities and increase their bets on emerging Asia and Japan. He said financials and the tech sector were likely to outperform.

“The US is the best performing economy, but valuations of the US dollar and equities are too expensive,” said Paolini in a press conference on Monday in Hong Kong.

“Animal spirits are driving the US markets,” he warned, suggesting that the irrational exuberance may not be sustainable and a short-term pull-back is increasingly likely in equities.

Paolini also believes there is a “disconnect” between the valuation in the US currency and the strength in the US economy.

“Our non-consensus view is that the US dollar will become a little weaker, as the US economy is not massively outperforming and President Trump looks unhappy with a strong dollar,” he added.

Conversely, Paolini recommended investors turn to equities in emerging Asia, including China and India, as the region’s economic prospects have improved thanks to rising global exports.

“China’s economic revival has been particularly noteworthy, with our leading indicator for the country notching up its highest level since December 2013,” he said.

Capital outflows from China, which have been a concern, have also eased, after the yuan stabilised and policy makers stepped up scrutiny of cross-border fund flows.

In the meantime, India will also see a V-shaped recovery following the steep economic downturn triggered by last autumn’s shock demonetisation, Paolini said.

He is also optimistic on Japanese equities due to its cheap currency and a pick-up in exports.

On a sector basis, Paolini said cyclical stocks in Asia are attractive, as the recovering economy bodes well for these stocks and the valuation is relatively lower.

Among cyclicals, he anticipated financials and tech shares will be two main beneficiaries from a post-Fed policy tightening world.

“Banks make more money when interest rates go higher, and tech stocks are less vulnerable to higher bond yields [compared with other sectors],” he said.

Paolini’s upbeat view on Asian markets seem unaffected by the prospect of the Fed lifting interest rates on Thursday.

“I don’t think the Fed’s rate hikes will trigger big capital outflows from Asia,” he said, noting that US dollar strength is a more important factor in driving capital flows.

“The Fed is not that important. It’s the dollar,” Paolini said.

Besides, it’s unlikely the Fed will raise rates too aggressively.

Instead, the trade policy from the Trump administration could have a bigger impact on China’s capital outflows, he added.