Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Andrew Swan, Manager of the BlackRock Asia Fund.
Hi, Andrew.
Andrew Swan: Good morning, Emma. How are you?
Wall: Very well. Thank you. How are you?
Swan: Good. Thanks.
Wall: Not as well as the markets perhaps because the markets have not been doing very well this year. Last week, I think, we officially went into bear market in China, down 20% and the currency is down as well. What's caused this downturn?
Swan: Yeah. As you said, we started the year actually on a very strong footing. And not only the early gains have been given up, but we're actually now in negative territory for markets. And what's interesting is, it's mostly sentiment that's driving the markets down at the moment, poor sentiment around future growth. Current fundamentals in the region, growth is actually still very robust. But the market is increasingly concerned about where growth will be going in the future due to the uncertainty that's been created by trade wars in particular, but also things like China's deleveraging process, the impact that may have on the economy.
Wall: If you look at China's growth, it's still a figure that would be pipe dreams to other parts of the world. But I suppose it's all relative to where they were before. You know, we are no longer in double-digit economic growth. And indeed, that's not something that the Chinese government have said that they are chasing either. So, how much of it is sort of negative perception versus reality? Are we right to be concerned?
Swan: China has definitely entered a phase of higher-quality growth rather than higher quantity of growth. That's been very explicit. And we are seeing that in the policies that are coming through. Higher-quality growth can actually be very supportive for equity markets and corporate profitability. But the sentiment is very different to that right now and it is very much that there's an expectation that if the policy, particularly, global trade, is implemented, trade wars, then you're going to see a fairly sharp downturn in growth. So, while growth is good at the moment, the market is very worried about where future growth is due to the changing and uncertain policy environment.
Wall: I suppose the trade though only really affects those sectors which are named by Donald Trump in this case as being targeted. How much does that then impact you as an equity investor targeting those sectors which perhaps are safe from Donald's grasp?
Swan: Well, as you said, the measures announced so far are insignificant really. There are some specific companies impacted. But the way the market is behaving right now is that it's going to escalate into something much bigger and with no end in sight. They are just a tit for tat type scenario where more and more sectors and more and more companies get impacted. Because it's not just the first order effect but it's also the second order effect. And I think what we have seen over the last decade or two is we are in a global economy where there are a lot of linkages and therefore, expectations that some economies may survive a downturn over others – there is not a good history of that so far. So, there is risk this does escalate.
But I would argue that the markets where they are today, if you look at various types of risk measures are already pricing in a fairly significant downturn. In fact, the risk appetite measures that we look at would suggest that markets are fearing a downturn similar to 2015 or 2011, even 2008. So, investors are bracing themselves at the moment in their positioning in the markets. I still believe this will resolve itself. But investors seem to have a different view to that right now.
Wall: I suppose that leads me to my final question is, how do you invest with that kind of hope that this is perhaps buying opportunity and actually fundamentals remain strong despite the concerns of the broader market?
Swan: Yeah. I think if you like to be contrarian at extremes, this is a great opportunity. And so, that's what we are looking to do is maybe move some of our outperforming positions into stocks which would be more impactive where we think ultimately a resolution will see some significant upside to those. So, I would argue lower-quality companies, more cyclical companies right now in the region, the ones which are trading now close to crisis-type valuations where a resolution, will see very strong returns to risk come back into the markets. And so, that's where we are starting to reposition our portfolios a bit more.
Wall: Andrew, thank you very much.
Swan: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
