Outlook 2019 - Mitigating risk with a balanced approach

  • 24 Dec 2018

    Despite the uncertainty associated with the China-US trade war, the current macroeconomic environment presents interesting opportunities for bottom-up stockpickers. In particular, long-term outperformance could be attained by striking a balance between capital growth and dividends.

    1. Attractive valuations, together with solid fundamentals and strong dividend growth potential, should offer Asia a strong buffer to the downside risk over the medium to long term.

    2. A faster-than-expected resolution of the China-US trade war could surprise the market on the upside.

    3. Companies with good dividend policies and strong dividend growth potential are likely to outperform in the current market environment.

    1. What is your investment outlook for [asset class] in 2019?

    While trade tensions between the US and China remain an ongoing concern across the region, I remain cautiously optimistic about the investment outlook for Asia Pacific ex Japan equity markets in 2019.

    Valuations in the region appear to becoming increasingly attractive, following the sharp correction in the latter half of 2018. The MSCI AC Asia Pacific ex Japan Index is now trading at a 12-month forward price-to-earnings ratio of 11.2x and a price-to-book ratio of 1.5x, which are slightly below one standard deviation from their long-term averages.

    Strong structural growth, driven by favourable demographics, growing urbanisation and consumerism, as well as ongoing reforms and rising infrastructure spending across the region, should continue to support economic growth in Asia over the medium to long term.

    More importantly, Asia looks to be currently sitting within a dividend sweet spot, as corporate cashflows are growing while capital expenditure and gearing levels are declining. Improving corporate governance is also leading to an increase in dividend growth among Asian companies.

    Attractive valuations, together with solid fundamentals and strong dividend growth potential, should offer Asia a strong buffer to downside risks.

    2. What do you think could most surprise investors next year?

    Market sentiment has been subdued in recent months, given the uncertainty associated with the China-US trade war. Investors are concerned that growth in China and its neighbouring Asian markets could decelerate drastically as trade tensions intensify.

    Thus, a faster-than-expected resolution of the trade war, as well as stronger-than-expected economic and corporate growth in China, could surprise the market on the upside and boost performance next year.

    3. How do you plan to capture the best opportunities?

    As a bottom-up stockpicker, I believe that the current macroeconomic environment presents interesting stock selection opportunities. I will continue to adhere to my fundamental-driven stock selection approach, and will take a very balanced stand on portfolio positioning with the aim of mitigating downside risk.

    The ‘growth and income’ focus of my investment approach means that I will look to strike a good balance between capital growth and dividends, with the aim of delivering long-term outperformance relative to the market and peers, with lower volatility.

    I believe companies with good dividend policies and strong dividend growth potential are likely to outperform in the current market environment, as investors are increasingly looking for companies with sustainable growth and a modest dividend buffer in times of volatility.

    Against this backdrop, I will focus on identifying companies that can offer good dividend growth potential and long-term secular growth. In particular, I pay close attention to companies’ balance sheet strength and their ability to generate cash flows, in order to help with the defensiveness of my portfolio.