Economist: Volatility in Asian markets will increase significantly | Capital Connection

Economist: Volatility in Asian markets will increase significantly | Capital Connection


So I think it’s to be aware that
potentially we’re moving into new unchartered territory and I think you
you pointed out many people consider just noise, now I think the realization
comes in that potentially downside risk could be more significant, so what that
means for portfolio construction we have been looking at unconstrained active
managers that potentially will benefit from higher volatility, because I think
volatility most probably will increase significantly and many portfolios are
still somehow positioned for low volatility markets, so active investment
strategies that benefit from higher volatility potentially would be preferred
over passive ETF that are net long only. So I think now’s the time to also look
at tail risk, in case there is more dislocation in capital markets, where you
have some hedges in the portfolio. Simon, when we look at this more broadly, Sri
was mentioning that there’s the fear that this could metastasize, that we’re moving
obviously into this uncharted territory, when we look at what happens next
particularly with this tit-for-tat between U.S. president Donald Trump and
the Chinese premier, when you look at the currencies, the potential for a currency
war does where as well there are a lot of talk about using currency as a weapon,
but of course with any weapon that could potentially backfire as well couldn’t it? The People’s Bank of China has a
delicate balancing act with the RMB I do think the RMB is probably
overvalued at the moment, it has been following the U.S.
dollar up on many of other similar currencies have been going down quite
substantially, so on a trade weighted basis, the RMB really is too strong and
should come down a bit, so I don’t think we need to be too worried about that
in the international markets the the worries though for the Chinese central
bank are domestic that if people within China think that the currency is set for
a free fall, then you get that pressure for the capital outflows in capital
flight ramping up, that’s what the People’s Bank of China is trying to
avoid, so depreciation is a good thing, as long as they can maintain
those domestic animal spirits. Michael do you agree because sure
you’ve got the concerns about capital outflows on the one hand, but what about the big Chinese
corporates that have to face dollar-denominated debts? Yeah and that is a big question
and this is also where, to some extent some rating agencies
had concerns with regards to systemic risk in China, but then so far
it was always considered too big to failure, that they will muddle through,
but that assumption pretends you can be tested and I think also the
Beijing leadership, most probably, will allow some more corporate
bond defaults to basically have more market discipline and I think
that’s also what we need, more market discipline, I mean this whole idea that
markets can only rise, yeah, I think it’s already misplaced, I think we had a lot
of QE – quantitative easing – that is now leading to quantitative tightening and
with that will come some potential capital market dislocations. Rainer when you look at what
happens next, how do you build this forward-looking portfolio? Look, I mean, it comes down to question and key assumptions what actually worked
in the past, might not necessarily work very well going forward. I think if
you look at Mr Trump’s policies, rather one of the key things it is
actually benefiting more the American worker than American or global
corporations and that is actually good for the American worker and also
means that the firm stock selection part of it and sector call it is more
domestic U.S. industries and those actually, we’re actually higher wages
feed through the American worker because I think this whole Trump debate
about global trade is that corporations have done very well, as we see in the
S&P 500, but the American worker has lost out and he is trying to sort of change
that slightly so the American workers [inaudible] will have higher wages so wage
inflation or wage growths at least, should be positive thing for American
workers, so anything related to that, other sectors potentially could see
headwinds. And one sector in which President
Trump has said repeatedly he wants to help the American
worker is the automobile sector, yet we’ve heard from General
Motors on Friday saying actually these tariffs could be
detrimental, they could result in job losses, we’ve heard warnings for the
likes of Moody’s on that too and Simon I want to bring you back into this because
you made the point at the very top of the show, about how vulnerable the
auto sector is to these tariffs but as president Trump actually hurting one
of the industries that he pledged to protect here? Certainly he would be hurting
large parts of the U.S. auto sector, other parts would benefit, I mean auto has set the central of this
trade dispute, because in one hand it’s very politically sensitive, it’s very
iconic and you know auto brands are very associated with national
psyches in all countries, but at the same time it’s also very internationally integrated,
our auto supply chains are very international, so the problem that
Trump and the U.S. industry will face with tariffs on in the EU imports is many of
them are going to be intermediate goods and so their imports that are going into
U.S. cars, so it’s going to make U.S. cars more expensive to make at the same time
as the prices of imports are going up so it’s just going to result in higher
prices at the end of the day.

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