This year’s impressive sharemarket rally has further to run, says State Street Global Advisors Asia Pacific head of investments Kevin Anderson.
“The cycle is certainly not over yet,” Mr Anderson told The Australian Financial Review. “Baseline economic fundamentals are still positive enough that we feel that we can confidently invest into equity markets.”
Mr Anderson, whose firm manages $3.9 trillion globally and $179.3 billion in Australia, warned, however, that the cycle is long in the tooth and investors needed to exercise caution. “We’re getting closer to the time at which you do call hold on your exposure or your significant exposure to equities. We’re being more cautious.”
Last week, central bankers in Australia, the US and Europe all signalled the potential for further rate cuts, driving sharemarkets higher and pushing the S&P/ASX 200 towards record levels.
After a slight pullback on Friday, the ASX 200 benchmark finished the week up 1.5 per cent at 6650 points, adding to a 1.7 per cent rise from the previous week.
Opportunity in emerging markets
Within equity markets, State Street has bumped up its exposure to emerging markets, attracted to the growth opportunities and relative stability found there.
“Emerging markets from a valuation perspective, we think are pretty cheap and fundamentally still robust,” Mr Anderson said.
Emerging markets offer value despite their exposure to the US-China trade dispute and the potential for further a breakdown in negotiations, he said.
“And we think there is a significantly narrower amount of political uncertainty than there is, for example, in Europe.”
Equities in Europe look cheap, he said, but political uncertainty in Italy and the potential consequences of Brexit for the eurozone meant he was less optimistic about the region.
“There’s a lot of political uncertainty in Europe. And it’s that breadth of uncertainty that makes us very cautious to allocate into Europe.”
Trade dispute and the electoral bid
The trade dispute between the world’s two largest economies – the US and China – remains the single most significant risk for business and sharemarkets, the fund manager said.
While the news last week that the two protagonists would hold talks sent a wave of optimism through markets, an immediate resolution is not on State Street’s radar. The most likely scenario is a gradual de-escalation of tensions, according to Mr Anderson.
“Tariffs aren’t going to come off anytime soon [and] are going to remain for some period of time,” he said. “No further escalation … and a kind of bilateral, step-by-step eventual removal of tariffs once the start of some macro deal is done,”
He holds this view in part because the US presidential elections will take place next year. Being able to present a perceived win to the American electorate will compel Trump to come to an agreement with China, he said.
Other potential scenarios include permanently hard trade barriers between the US and China, which Mr Anderson put at less than 50 per cent.
Such a development would mark a departure from the progressive globalisation of trade seen over the last quarter of a century, he noted.
The worst scenario would be an ongoing escalation of the current dispute, he said. This would result in entrenched trade divisions and create trade blocs with echoes of the communist-capitalist partitions of the 20th century.
“For us the worst case, and what we think is likely the lowest probability I would come to, is that we end up with what you might think of as trade blocs,” Mr Anderson said. “A US trade bloc [and] a China trade bloc.”