Global perspectives on asset management

The impact of Covid-19 on the stock market has been very clear, explains Shi Bo, deputy general manager and chief investment officer (equity) at Southern Asset Management.

Although the pandemic came as a shock to the market, it is actually good news for asset prices and particularly for high-quality assets. From the US to China, the core macro policy response has been to adopt monetary easing, and in such an environment high-quality assets benefit most. Asset prices will remain stable – or even achieve some growth – if relatively loose monetary policies stay in place over the next few years.

High-quality assets include the leading companies in their industries, which have more scope for growth and acquisition than lower-quality competitors.

We are optimistic about companies that are well-managed financially. Their balance sheets are stable structurally and they have sufficient cashflows and profits. The world economy is still shrinking and thus companies with solid cashflows are more resilient.

We also favour companies that pay stable dividends when interest rates are low, as they tend to have stable investor bases and stock prices. On the surface, the returns from these companies are not the highest, but they are in fact very attractive on a risk-adjusted basis.

There is a clear trend for Chinese companies listed overseas to come back to a domestic exchange. Chinese companies listed in the US are primarily technology and consumer brands that would be much better positioned in a domestic exchange as they work to strengthen their brand and improve communication with customers and investors.

Chinese stocks remain attractive. Foreign investors look at multiple factors before they decide whether they will continue to go long on Chinese equity. In addition to growth potential and corporate governance, they will consider factors such as stability of exchange rates and reductions in financial restrictions.

Compared to other equity assets, Chinese equity is more attractive in terms of growth potential and shareholder return.

The Chinese equity market is likely to outperform its European and American counterparts over the next five to 10 years. The value A-share stocks can generate for a portfolio has been gaining recognition from all players in the market, including some long-term investors in China such as insurance companies, annuity funds and pension funds. Another trend that has become more apparent over the last couple of years is individual investors tilting toward equity investment.

Stephen Dover, head of equities at Franklin Templeton, explains that much of the recent stock market volatility can be attributed to changes in the outlook for Covid-19 infections.

Equity markets’ resilience in the face of rising disease uncertainty demonstrates that investors are primarily concerned with reserve bank actions and governments’ fiscal stimuli, largely ignoring economic fundamentals and the high degree of uncertainty surrounding the pandemic’s path.

There is a disconnect between the stock markets and high street, with equity prices remaining elevated despite data indicating deep economic harm.

Fiscal, monetary and political responses to the crisis globally have led to a world awash with liquidity and short-term fiscal stimulation. Much of that liquidity has gone into the stock markets. The key question is whether markets will continue to climb based on monetary and fiscal responses.

Bear markets typically happen when there is monetary tightening – a development we do not expect to happen. The negative catalyst could instead be economic disappointment relative to expectations of a sharp, v-shaped recovery, and we believe stock market and economic fundamentals will not remain disconnected forever.

The US presidential candidates present two of the most diverse political approaches in recent memory, with policy differences on how to address the recovery from Covid-19; the tax system; the role of government in healthcare; immigration and the workforce; whether and how to address climate change; and whether to take a unilateral or multilateral approach to foreign policy. The US Congress outcome is as important as who wins the US presidency, and the market may experience additional volatility as we approach the election.

The markets have not yet priced in the potential for large increases in personal capital gains taxes and corporate tax and additional business and environmental regulations if the Democrats win the presidency as well as a majority in Congress.

A decade ago, the US accounted for approximately 40% of global market capitalization. Now that figure is approaching 60%, which we believe on a relative basis makes the argument for investing outside the US.

In addition to China, we are positive on some emerging market countries and Europe, which seems to be ahead of the curve on coming out of the pandemic. Globally, while low interest rates, fiscal stimuli and easily available financing have helped keep some weak companies alive, debt is not a substitute for lost revenues and profits.

Our view is that companies with clear business strategies, economic buffers, workforce diversity, commitment to ESG principles, returns above the cost of capital, strong balance sheets, positive cashflow and skills leveraging technology will do well over time.