Lack of clarity in renminbi policy has undermined confidence in Beijing’s decision-making, with little prospects of a let-up in the near future, believes Deutsche Asset Management Asia-Pacific CIO Sean Taylor.
In an interview with AsianInvestor, Taylor said the firm was underweight on China from a portfolio perspective, in part driven by lack of confidence in the government’s efforts to support the A-share market and RMB.
China was criticised over the imposition of its circuit-breaker at the start of this year designed to stabilise its equity market. It had the opposite effect, exacerbating volatility, and had to be abandoned within a week. The RMB also started this year with its sharpest depreciation against the dollar since it shocked the market by announcing a new exchange fixing rate on August 11.
“What is being really difficult is China, which has equity market volatility and lack of clarity in renminbi policy,” Taylor said. “Although we believe in [China’s] long-term restructuring, it will take so long.”
He added that China's powerful Central Politburo – a 25-strong group comprising regulators and government officials – was due for its five-year reshuffle in 2017, raising expectations of continued cloudiness in policy-making in the interim.
At the same time he said Deutsche Asset Management could seek tactical trading opportunities if positive noises and policies emerged from the annual meeting of China’s National People’s Congress this March.
Taylor confirmed that Deustche Asset Management had been bearish on emerging markets at the end of last year and had since raised its cash levels even further and lowered the level of beta in its portfolio.
He said the firm had downgraded its EM earnings-per-share numbers to -5% for 2016, against a market consensus in the high single digits. “So we are more bearish than consensus,” he affirmed.
Asked what the turning point might be for emerging markets, Taylor answered evidence of Chinese growth, inaction by the US Federal Reserve on interest rates, a bottoming out for commodity prices and stabilisation of the renminbi. “However, this is not our base case for 2016,” he noted.
While Deutsche Asset Management prefers developed over emerging markets currently, Taylor does have constructive views on parts of Asia not so reliant on commodity exports, such as India, the Philippines and Taiwan.
He added he preferred investment-grade credit over equities or currencies, with Asian corporates in relatively better shape since repairing their balance sheets after the 1997-98 Asian financial crisis.
Taylor said he was positive on the outlooks for government spending in the Philippines and Thailand and the consumer sector in Korea, where he anticipates continued demand from China for cosmetics.
He added there were selective names he liked in China, including some property companies in tier one and tier two cities with strong balance sheets, a low cost of funding and stronger levels of transparency.
He added he liked the decent yields on 10-year Indonesian government bonds (8.2%) as well as Indian credit. “We expect Indian interest rates to come down further as long as domestic food prices continue to be stable and/or lower. Besides, the low oil price helps to contain the consumer price inflation number too.”
In equities, Deutsche Asset Management prefers Japan to the rest of Asia, with Taylor identifying two catalysts: more QE /negative interest rates to encourage spending, and corporate restructuring leading to higher return on equity. "We haven’t had much change to our Japan portfolios given that, as long-term investors, we have been positive for a while," he explained.
Deutsche Asset Management had $836 billion in AUM as of September 30 last year, of which $79 billion was sourced from clients in Asia-Pacific, according to AsianInvestor's list of the top 100 fund houses set to be released soon.