Contrarian Case Says U.S. Growth Slowdown a Boon for Asia Stocks

(Bloomberg) -- There’s at least one bullish way of framing U.S. economic growth slowdown concerns: It could benefit Asian stocks.

So says Edward Lim, a fund manager at Singapore-based Covenant Capital Pte. His rationale is that while the U.S. isn’t entering a recession, the difference between its economic growth, corporate profits and interest rates relative to the rest of the world has narrowed, which in turn will weigh on the U.S. dollar -- and bolster Asian stocks.

Asian markets look attractive due to stronger economic growth and lower valuations when the Federal Reserve is close to a neutral stance on interest rates, and as the impact of President Donald Trump’s policies dissipates, Lim said. He has an overweight stance on the region’s equities, neutral on U.S. and underweight on Europe.

“U.S. exceptionalism in growth will fade away” in 2019 as the rest of the world catches up to America, he said.

Earnings growth differentialEarnings growth FY18 %Earnings growth FY19 %
U.S. vs World+9.2+0.4
U.S. vs EM+190
U.S. vs China +16-5.1
U.S. vs Europe +150
U.S. vs Japan +21-1.1
Source: Covenant Capital, Bloomberg

Lim’s views are in stark contrast with money managers at Allianz SE, State Street Global Advisors and Capital Group Cos. who have recently said that buying U.S. stocks remains the top trade for global investors.

His economic models and data show no recession, Lim said -- but that may change if the U.S. and China are not able to resolve their trade conflicts. President Donald Trump said talks to resolve the U.S. trade war with China are making good progress and “going along very well.” This comes after he said he was open to extending a March 1 deadline to raise tariffs on Chinese products if the two sides are near an agreement, sending a conciliatory signal amid talks to resolve the trade war between the world’s two biggest economies.

Lim, who declined to provide his assets under management, expects an 8 to 10 percent return from equities this year and advises investors to buy stocks in China, Japan and emerging markets like Indonesia. He has added defensive and growth stocks to his portfolios. The S&P 500 Index has gained 9.8 percent this year, while the MSCI Asia Pacific Index rose 7.1 percent.

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