A Santa Rally and Stellar 2019: Allianz GI's Asia Stocks Calls

(Bloomberg) -- A $4.3 trillion wipeout in Asian equity markets hasn’t stopped the chief investment officer for Asia Pacific at Allianz Global Investors from making an optimistic call: the region’s shares may rally into December and outperform their U.S. peers in 2019.

To Raymond Chan, the elements needed for a year-end rebound are a hand shake between the U.S. and Chinese leaders at this month’s Group of 20 summit and a nod for further talks to alleviate the trade war. Some concrete solutions to resolve the dispute would be the cherry on the cake. He sees these as likely outcomes and expects a relief rally, especially after the rough October markets had across the region. And Asian stocks’ cheap valuations are a kicker, he said.

“The market and corporates are sending strong signals to the White House that the tariffs are definitely having an impact on profitability,” Chan said in a phone interview. His firm oversees the equivalent of $567 billion. “The time is right for the White House to start talking.”

With industrial bellwether Caterpillar Inc. citing elevated expenses due to tariffs and multinationals such as Ford Motor Co. bemoaning high steel costs, concerns over future revenue and margins at U.S. companies are spreading. While Asian shares bore the brunt of the sell-off last month, the S&P 500 Index didn’t come out of it unscathed. That’s why President Donald Trump will have to come to the negotiation table with his Chinese counterpart Xi Jinping, Chan said.

Seasonal trends are also on bulls’ side, if history is any guide. Since its inception in the 1980s, the MSCI Asia Pacific Index climbed two-thirds of the time in December, rising an average 1.7 percent -- the best month after April, data compiled by Bloomberg show.

With a potential year-end rebound in mind, it’s likely Asian shares will outperform their U.S. counterparts in 2019, according to Chan. Just like in 2017, when the regional benchmark surged almost 30 percent, compared with a 19 percent advance in the S&P 500 Index.

“I’m not buying into ‘this is a bear market’ idea,” he said. “What we see so far is actually a correction of the previous year’s rally for Asian markets.”

The reason why he stays upbeat about the region is because the nations’ economies are much healthier than during the Asian crisis of the 1990s. Then there’s also the U.S. dollar, which can’t stay strong forever: With a softening greenback, currently depressed emerging-market assets are poised to rebound.

“At some point the U.S. dollar has to weaken,” Chan said, noting that the country’s twin deficits, a potential slowdown in the American economy and an increase in inflation may trigger a weaker currency. “Once the dollar turns at some point next year and Asian currencies start to perform, the flow will come back to Asian markets.”

That’s, of course, if there is no full-blown trade war.

“If this happens, then everything else will be off the map,” Chan said.

Chan’s predictions didn’t prove prescient last year. Like many other market watchers, he was bullish heading into 2018, and he called for more Hang Seng Index gains, along with an underperformance of U.S. shares. The opposite happened: the Hong Kong gauge has plunged 14 percent so far, while the S&P 500 has climbed, hitting fresh records along the way.

Other Comments

• Hong Kong and China may bounce back stronger if Asian markets rebound.
• The downside is limited for Hong Kong stocks given the current Hang Seng Index valuation.
• China’s economy will stabilize next year as stimulus measures usually take nine to 12 months to work.
• Flows from foreign investors will also help A-share performance. He prefers Chinese consumer, oil and clean-energy stocks.
• He favors Thai industrial estate companies as the Eastern Seaboard is getting developed. The country will also benefit from production moving out of China as companies seek to diversify.
• He also likes telco companies in Indonesia as their earnings outlook is improving.
• The technology sector, especially semiconductor and hardware stocks, may continue to underperform until the first half of next year as inventories build up on the supply side and demand weakens.

To contact the reporter on this story: Moxy Ying in Hong Kong at yying13@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Cecile Vannucci

©2018 Bloomberg L.P.