Zurich Malaysia’s CIO on the key risks of 2019

Slowing global economic growth. Rumbling US-China trade tensions. Volatile oil prices. Rising interest rates in the US. Emerging market woes. Brexit.

With so much to worry about currently the road ahead is littered with deadfall and deadly booby traps, so navigating a path ahead in 2019 will be tricky for investors in Asia, to say the least. 

Top of the agenda for most remains the ongoing trade tensions between the world’s two largest economies.

Andrey Fomin, chief investment officer of Zurich Malaysia, is among those in that camp: "A prolonged US-China trade war remains a key risk that could lead to a postponement of investments and spending by investors, consumers and businesses, leading to a negative impact on confidence,” he told AsianInvestor last week.

“While the markets have reacted positively on optimism that both US President Donald Trump and China’s President Xi Jinping had agreed to a 90-day period where no new tariffs would be imposed at the recently concluded G20 Buenos Aires summit in Argentina," he added, "it remains uncertain how both countries will resolve underlying concerns over trade barriers, subsidies and alleged technology theft.”

The December 1 agreement has raised hopes of a revival in economic relations between the two nations but the road to an all-encompassing trade deal will be long and arduous, Fomin believes.

Inevitably, he favours a more cautious stance in the near term, and he is unlikely to be alone.

One specific sector that could bear the brunt of a bruising tit-for-tat trade retaliation is technology since the Trump administration has already identified China as a strategic technological threat, noted a 2019 outlook report by Allianz Global Investors also published last week.

“This may prompt both the US and China to build their own discrete tech ecosystems. The result could be a ‘tech cold war’ that lowers profit margins, inhibits innovation and disrupts the global supply chains of tech companies in Asia and the US,” the report said.

LOOMING US RECESSION?

Fomin also highlighted the risk of continued US monetary tightening, not just rising interest rates but also the unwinding of the Federal Reserve balance sheet, which he predicted would likely mean a drain on emerging market liquidity and a stronger US dollar in the interim.

Nevertheless, he noted that there is a real likelihood of a recession in the US in 2020, which will have global implications.

Other local asset owners such as Prudential Malaysia have voiced similar concerns.

Rob Waldner, chief strategist and head of multi-sector, at Invesco Fixed Income, believes the US economy has moved past its peak levels of growth. In an outlook report released on Monday, he said investors should expect a US slowdown in the second half of 2019.

Of growing concern is the flattening US yield curve, which could make it more challenging for the Federal Reserve to hike twice in the latter part of next year, he added.

The closely watched yield curve, which plots the relationship between short, medium-term and long-term rates of US Treasury securities, typically slopes upward from left to right on the graph as maturities lengthen and yields rise. A flattening of this curve leading to its inversion is historically a strong lead indicator of economic recession, albeit with a lag of up to two years, according to economists.

Currently, the spread between the US two-year note and 10-year note (which is what many money managers use to claim yield curve inversion) is hovering around 10 basis points – broadly speaking the narrowest gap since 2007.

And then there are the fast-moving political events in Europe, not just Brexit but also the growing budgetary tensions in France and Italy, which although thousands of miles away from Asia also have the potential to drag on global growth. After all, taken together the economy of the European Union is similar in size to both the US and Chinese economies. 

Fomin did not elaborate on the insurer’s asset allocation plans for next year but said Zurich Malaysia had increased its equity allocation in the first quarter of 2018, especially into real estate investment trusts to enjoy their higher dividend yields. It also reduced allocation into Malaysian government securities due to the higher volatility of local bonds.

He also said that in 2019 it plans to invest in Malaysian private debt and also believes Asian listed equities offer good entry points after recent falls.