Uncertain financial market and economic growth conditions have prompted Axa Affin Life Insurance to adopt a more defensive investment stance as it approaches 2019, its chief financial officer has said.

“Given our cautious outlook, where possible, we have raised our cash allocation in some of our funds but remain convinced of the [economic] fundamentals,” Kelvin Wong Wei Win told AsianInvestor.

However, he did not specifically state to what degree cash allocations had been increased or on which funds. He also did not say if the fund was making any other changes to the investment portfolio as a result.

The insurer, a joint venture between Axa and Malaysia’s Affin Bank, has about $380 million in investment assets, a major proportion of which is invested in local currency bonds.

According to its semi-annual financial statements, cash and cash equivalents rose to about $25 million from around $12 million a year ago. Cash represented 6.1% of Axa Affin's total assets as of end-June.

TRADE WAR WORRIES

Slowing global economic growth and growing trade tensions between the US and the rest of the world, in particular with China, are among the factors that justify a more cautious outlook for Wong.

“Trade issues are certainly concerning since both China and the US are trading partners of Malaysia. China is our top trading partner, while the US is No. 2,” he said. "If trade tensions are not resolved we will see the full impact of tariffs."

Since the start of this year, the US has imposed tariffs on a range of Chinese imports totalling hundreds of billions of dollars, with September witnessing another wave of tariffs of 10% on $200 billion worth of Chinese goods.

The new 10% tariffs, which hit goods such as furniture, computers and car parts, are set to rise to 25% on January 1 if both sides don’t reach a resolution.

The threat of an escalation remains but the US mid-term elections earlier this month, which saw the Democrats take the house and the Republicans holding the Senate, is giving investors some hope.

“A divided house in the US, could lead to the possibility of fewer policy shocks and markets tend to like that,” Wong said.

An investor update from asset manager Schroders also noted that conventional wisdom generally dictates that a gridlocked Congress tends to be good for markets as it prevents politicians from interfering in the economy.

“Going forward, gridlock means less fiscal support for the [US] economy as [the] Democrats are unlikely to back further tax cuts. This could create a problem for US growth in 2020 when the existing package fades and is not replaced by further measures,” Schroders said.

“Faced with a potential block on fiscal policy, the president may turn to trade policy and look to strike a deal with China, and so prevent a further damaging escalation in the trade war,” the research note added.

US INTEREST RATES 

Some policy moderation may be what is needed given slowing global growth, which could also affect the pace of further US interest rate hikes.

"We expect the [Federal Reserve] to hike rates again in December, and although we see the gradual tightening path extending into next year, the outlook is less certain. A potential Fed pause is creeping up in market valuations, which currently reflect just two more rate hikes next year,” Neeraj Seth, head of Asian credit at BlackRock, said in a 2019 outlook issued on Tuesday.

Rising US interest rates will continue to exert pressure on capital flows into emerging markets, said Axa Affin’s Wong.

He describes it as a key medium-term concern given the degree to which eight Fed hikes since late 2015 have already increased the relative appeal of US assets, supported the dollar, drawn capital away from emerging markets, raised the cost of servicing dollar debt, and exposed the funding frailties of countries with large current account deficits, such as Turkey and Argentina.

That, in turn, will keep the pressure on Asian central banks to raise their own interest rates to insulate their currencies against the greenback's gains and avoid another 1997-type crisis.

"Central banks across the region have [already] raised their rates. Malaysia’s was one of the early ones, hiking at the start of the year,” Wong said.

Malaysia, Indonesia, Philippines and India, to different degrees, have all tightened their monetary policies this year to cope with the tougher market environment.

“Given the current situation, we expect there could be another interest rate hike  [in Malaysia] in the second half of next year, although the situation is quite fluid,” Wong added.

*This story has been updated to reflect the correct name of the partners in the JV.