[SINGAPORE] Uncertainty over policies and trade tariffs rolled out by US President Donald Trump could see investor sentiment “reverse” from US exceptionalism to favour emerging markets.
Serene Chen, head of credit, currency and emerging market sales at JPMorgan Chase, noted that investors were largely bullish on US equities and the greenback, and bearish on the euro, before the start of Trump 2.0.
However, all that has now been reversed, she said.
She explained that there has been greater investor rotation into emerging markets, including those in Asia.
For instance, she pointed out that Hong Kong’s benchmark Hang Seng Index has posted good performance over the last few weeks. She added: “Investors will (likely) see emerging markets be a net beneficiary of potentially the US Federal Reserve bias towards lower rates. All the emerging market central banks have been waiting for breathing room to potentially cut rates.”
This trend, she added, is particularly evident in “higher-yielding currencies in the region” – such as India, where investor inflows are notably increasing.
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Looking ahead, Chen reckons more investors in Asia will seek safe-haven assets.
One key strategy would be to invest in long-term global currency bonds with a foreign-exchange hedge, she said. This is particularly relevant in markets such as China and India, where hedged bond performance has been strong.
Another option is hard currency emerging-market credit, which has experienced three consecutive years of negative net supply – implying that fewer bonds are available.
With limited supply, investors can still achieve returns of around 5 to 6 per cent, making this asset class attractive and “broadly supported”, she noted.
However, Chen warned that potential volatility could heighten foreign-exchange risks.
Meanwhile, JPMorgan chief global economist Bruce Kasman estimates that there is a 40 per cent risk of a recession in the US, which could fan bullish sentiment over emerging market opportunities.
He added that he has become “less comfortable” with the idea that the Trump administration supports the country’s business sector.
The fiscal actions in the US appear to have moved from efficiency-focused to austerity-focused, he felt. Instead, the administration is “focused on restraining actions that will be disruptive to make sure the expansion is going forward”, Kasman added.
