“Our base case is that the placement of more tariffs will be avoided and perhaps reduced in the not-too distant future, which would be positive for China, the US and the rest of the world.
“We believe that the trade truce, and expectations that further tariffs will not be activated, can remove uncertainty; thus preventing a global recession,” its multi asset management team said in a recent analysis.
Hubert Aarts, executive director and co-head of listed equities at Impax Asset Management, told Expert Investor that “after two years of weaker global growth a deal might provide the healthy ingredient for improving global GDP”.
Global manufacturing recession
While such a deal would likely take a global recession off the table, Nikko AM says that a global manufacturing recession is already under way, driven by faltering demand for technology hardware.
Manufacturing and global growth could pick up if the outsized inventory cycle winds down; some drag caused by tariffs will nevertheless occur, Nikko AM said.
Overall, emerging markets will benefit from the US Federal Reserve’s shift from monetary tightening to easing, which Nikko AM believes will ease liquidity conditions across emerging markets.
Aarts points to opportunities in China and India.
“In China, domestic spend on infrastructure and sustainability, as part of its Five-Year Plan and commitment to reduce carbon emissions per unit of GDP, provides a number of interesting long-term investment opportunities that includes rail infrastructure, renewable energy and soil remediation.
“Similarly, India’s commitment to reduce carbon emissions also provides interesting opportunities for companies that benefit from the region’s build out of a decarbonised power system (electricity) which includes both renewable infrastructure and natural gas distribution networks.
“Furthermore, Impax believes businesses providing solutions to water scarcity and treatment in this region look attractive,” he explains.
For the credit market, Holger Mertens, head portfolio manager for global credit at Nikko AM, told Expert Investor: “We see some positive grassroots in terms of global growth but remain careful on the credit side.
“We centre our investments on domestic based businesses, ie telecommunication, but still underweight companies with exposure to global trade, ie automotive.
“In emerging markets, we are currently focused on interesting idiosyncratic investments ideas. We like rates as well as currency risk in Mexico, Indonesia and Russia.”
Key points of Nikko AM’s analysis on emerging markets:
- Growth in the rest of Asean remains stable thanks to a mix of supply chain-related foreign direct investment, monetary easing and fiscal stimulus–factors that have helped fill some of the demand gap from China.
- Taiwan benefited from the US-China trade conflict, targeted sanctions against Chinese companies and a trade spat between South Korea and Japan. It is picking up on increased demand for its semiconductors.
- Vietnam is still likely to be the biggest beneficiary of reconfigured supply chains within the region. The country has managed to stay clear of president Trump’s wrath for the most part and remains a top equity performer.
- South Korea’s semiconductor production has lagged, partly due to its trade spat with Japan.
- Growth in India remains weak. The country continues to experience feeble consumption and investment due to an undercapitalised banking system, with shadow banking still frozen up. The recent corporate tax cut could lift both earnings and growth, but it will take time.
- Meanwhile, the Latin American region suffers from weak growth and failing reforms. Brazil is sticking to its reform agenda, but patience is wearing thin both among the populace and its politicians. The reforms promised a return to growth which is yet to materialise.
In its most recent fund selector research, Last Word has found that after a strong start to the year, average demand for global emerging market equities fell in Q2 ’19 and is down sharply in Q3 (see graph below).