China would be particularly vulnerable to tough US trade policies because authorities have, in recent years, struggled to protect the economic growth rate, Jerram said during a media briefing on Wednesday.
The rest of the emerging markets are at risk as well, particularly in Asia, which is unfortunate as emerging Asia has had strong performance of the Purchasing Managers’ Index (PMI) in 2016 compared to 2015.
A lot of emerging Asian countries export to the US through China, and for many of these economies, 4-6% of their GDP is dependent on US demand.
“They are exporting components to China and then re-exporting it to America. If you factor that in, then the whole region is vulnerable to US trade friction,” he said.
Adding to the bank’s worries is China’s expanding credit.
According to Jerram, although the Chinese economy has been doing well over the past 12 months, there has been a steady expansion of the Chinese credit bubble.
“The debt service ratio in China has gone from 13% to over 20% just in the past decade. So if you have some sort of economic shock mainly driven by US trade pressure, it makes it harder to service that debt,” he said.
He added that China’s reaction to American trade pressure would be unpredictible. Authorites could be accommodative or they could push back hard.
The bank is currently negative, not just on China equities, but on Asian equities, according to Johan Jooste, the bank’s chief investment officer, who also spoke during the briefing.
He added that the bank is cautious on global equities, but favours the US over the rest of the world in spite of expensive valuations.
Asset allocation
Bank of Singapore’s case scenarios are based on how US policies will play out as Donald Trump becomes president, according to Jerram.
For example, there is potential for bank deregulation and constructive tax reform, but a very aggressive trade policy would be detrimental to the global economy.
The bank prefers bonds over equities. In its base case scenario, the bank is slightly underweight equities, Jooste said, noting that he views it as a tactical strategy.
“We have some cash in our portfolios but we are looking to deploy that subject to a bit more clarity on what Trump does and what the developments are globally,” he said.
In terms of equity sectors, the bank favours US financials and US healthcare, given that the deeper yield curves improve bank earnings, and that deregulation in the US will benefit both sectors, Joost said.
He added that if investors want to go in the global equities market, they should look for domestic-oriented companies such as technology stocks.
On the fixed income front, BoS likes credit and urges investors to stay away from long duration, according to Jooste.
“The assets that don’t expose you to clear risks are the ones to follow. So a clear risk is that rates may go higher, so long-term duration is clearly to be avoided.”
He also suggests floating rate assets for those investors that have more defensive portfolios.
“As the Fed hike rates, floating rate assets re-price in a positive way,” he said.
