Caution On BRIC Economies As Wealth Industry Ponders Economic Outlook - Conference

Chrissy Coleman

18 April 2013

This is the first of three articles covering a recent conference, hosted by the publisher of this website, in Hong Kong. Articles from other parts of the event will be published in due course.

Caution towards BRIC economies and the emergence of large onshore and offshore Renminbi markets emerged as a key themes when wealth management industry figures gathered at the WealthMatters Hong Kong conference recently hosted by the publisher of this website.

The event, which was held at the Grand Hyatt hotel in Hong Kong – in association with Coutts - attracted more than 100 attendees and featured three panel sessions. The first examined the current investment landscape; the second covered the issue of keeping clients happy and managing the client experience, and the third looked at strategy and business models in wealth management against a background of changing Chinese demographics.

This article shares the highlights of the first panel: Investment and Economic Outlook.

While BRIC nations have had investors buzzing ever since the acronym was first coined in 2003 by a US investment bank, Coutts’ chief investment officer for Asia and Middle East, Gary Dugan, is turning less optimistic.

“Everyone, including ourselves, started the year by saying emerging markets is the place to be but we’ve had to change that,” he said.

The reason developing countries aren’t looking so hot any more is down to serious inflation risks. While the US is content swimming in dollar bills thanks a trigger happy Bernanke keeping his finger on the “print” button, it is Asia that is suffering, he said.

“I’ve learned over the years that the US only really looks after itself - as far as the Fed is concerned everything is fine because they’re printing a lot of money. They’ve got an economy that’s doing very well and they’ve got only 1.5 per cent inflation,” said Dugan.

However the situation in Asia is different. “Outside of Japan, inflation rates are trying to be controlled. This is the biggest problem that I think Asia is facing at the moment,” he added.

Turning his attention to China, Dugan said: “We had a country that was doing very well for an extended period of time and now we’re not sure where the growth rate is going to settle.”

As a result of uncertainties, Coutts is basing its portfolios on the short term. Dugan said the bank is overweight in equities, and “wouldn’t give up on the US or eurozone”. In terms of the bond market, he believes the “bubble” is not sustainable and therefore not considered appropriate for a longer term, wealth preservation strategy.

One thing is certain to Dugan however: “Emerging markets are not the place to be.”

Bonds

Meanwhile, for Raymond Gui, portfolio manager at Income Partners, a Hong Kong based asset manager focused on fixed income markets, China presents many opportunities.

According to Gui, despite the current environment featuring zero interest rates and the fiscal contraction of developed countries, global quantitative easing will “potentially continue to support the performance of risky assets, including equities commodities and bonds.”

Gui is particularly keen on the offshore and onshore bond markets which respectively are valued at RMB 1 trillion (approximately $161.5 billion) and $4 trillion. As the renminbi is becoming internationalised, and thanks to emerging offshore RMB centres and the QFII quotas increasing, accessibility to the China bond market has greatly improved in the last 2-3 years.

“As a HK based asset manager, we have been waiting for such an opportunity for 20 years already. For the past three years we have been actively participating in the offshore RMB bond market and have actively been investigating access to the onshore market,” he said.

“Taking into consideration the size of the onshore and offshore bond market, the fact that China is the second largest economy in the world, the relatively higher growth rate of China’s economy, and it's much healthier country balance sheet, there is no reason for global investors not to allocate into China’s bond market,” Gui added.

Strategy

In terms of a fixed income strategy, he said the firm is focused on managing the heightened interest rate risk, especially if the market starts to expect the Fed’s exit from quantitative easing later in the year.

“So it makes a lot of sense to keep bonds for shorter duration and move up the credit quality spectrum, sourcing those remaining pockets of value on a bottom-up fundamental basis,” he said.

Income Partners especially favour a well-diversified Asian high yield portfolio with less than three years’ duration and average credit quality of BB+, just one notch below investment grade. “This type of portfolio will generate more than 6 per cent yield in US dollar, which is pretty attractive considering the zero interest rate environment,” Gui said.

With regards to advice on currency allocation, Gui said that this year it’s hard to position for the long term “because we are in a global currency war, and performance of currencies are all relative”.

But there is one very attractive strategy that potentially achieves a winning balance of risk and reward, according to Gui: “That is to long the 12-month CNH (offshore RMB currency) deliverable forward. As the 12-month CNH forward is traded 2 per cent lower than the CNH spot, such a position will get 2 per cent positive carry.”

He added: “The downside risk for this type of position is relatively low because even if the CNH spot depreciated 2 per cent in 12 months, this position will break even. And RMB is a low volatility currency, with limited downside.”

Meanwhile he cautioned that equities will require more downside protection, more specifically – “selected Chinese equities with sound fundamentals and at historical low valuation”.

With regards to commodities, Gui said this asset class will only perform when real inflation picks up, which has not been observed thus far, explaining the recent underperformance of gold in 2013's first quarter for example.

“That’s why at this moment, commodities are not very attractive for me in terms of risk-reward as you’ll have to wait - they provide zero carry,” he said.

Beware

Presenting investment views from the private banking clients’ perspective was Bruce Weatherill, wealth management industry veteran and ClearView Financial Publishing’s chairman.

Weatherill put forward a number of factors that investors need to “beware” of in today’s ever changing landscape, highlighting current and future geo political issues.

2012 saw the euro crisis, the appointment of multiple different country leaders, worldwide quantitative easing, the Arab Springs and conflict in Korea – all themes that still prevail in 2013, plus more. This year we also see Japan’s target to double money supply and further global elections to add to economic and political uncertainties, Weatherill said.

Inflation will be one of the worst enemies to clients, he added.

“What they are emerging, Asian centres and their ratings are rising, which is remarkable,” he said.