Staying in cash and waiting for the right opportunities to come by could prove rewarding in the new year that’s likely to be more volatile than 2018, according to Pacific Investment Management Co.
“We are cautious on our overall risk positioning,” said Roland Mieth, Singapore-based emerging-markets portfolio manager at Pimco, which oversees about $1.7 trillion. “Both in Asia and globally, we’re looking to maintain exposure to high-liquid portions of the market as well as increasing cash.”
Pimco joins investors including JPMorgan Asset Management in questioning global expansion forecasts for 2019 amid the ongoing U.S.-China trade spat and shrinking of balance sheets by central banks. The Federal Reserve’s commitment to continue reversing stimulus of the past decade would lead to steepening of the yield curve in Asia, according to Mieth.
A gauge tracking bets for swings in stocks, rates, currencies and commodities globally is holding near a two-year high reached on Dec. 10. The Bank of America Merrill Lynch Market Risk indicator is still in negative territory though, and has been under zero -- signaling less stress than normal -- for the past two years.
“We’re not adding risk at the moment because we think it pays to wait, and our base case is to wait for the first half of next year,” Mieth said in an interview. “We are looking for opportunities in the short-end of the curve as part of our cash-management strategy. We are looking to keep the powder dry.”
While Pimco is broadly cautious in its outlook on emerging-market sovereign bonds, the money manager finds debt in India, Indonesia and China attractive.
“We like India, Indonesia and China, in that order, and where we would like to potentially add,” said Mieth. “We will remain more neutral on countries including Korea, Malaysia, the Philippines and other low-yielders around the region.”
Some other comments Mieth made:
On corporate bonds:
There are places where we’re looking to potentially add to our exposures. If you look at the high-yield sector in Asia, valuations are starting to become attractive
Countries like China will be at the forefront to add if conditions become appropriate
On dollar and Asia FX:
— We expect the dollar to be more rangebound in 2019
— Currencies in the region are likely to depreciate gradually next year. The yield gap between the U.S. and China is increasing in favor of China. All those factors suggest CNY will depreciate, which will impact all other Asian currencies
— India’s rupee and Indonesia’s rupiah could potentially appreciate
On US-China truce:
This is a near-term positive and risk sentiment is going to be partially supportive of that. But we are more cautious in the sense that the trade tensions are of significance as an important indicator of broader issues that China and U.S. are looking to solve.
The tensions are here to stay and that will remain a very important aspect of what investors will need to take a look at. The 90 days is another chapter of that medium-term dynamic we are watching.