How to invest in a protectionist market environment

Following the US withdrawal from the Trans-Pacific Partnership (TPP), Asian investors are seeking out ways and means of investing in what may be a prolonged protectionist trade environment.

There are some secrets to investing in a protectionist market environment. First is to invest in a market which will be least affected by the collapse of the TPP. India, for example, is a relatively close economy, which is not expected to be impacted by increased protectionism from the US.

Second, investing in relatively open markets like Singapore (exports are over 100% of GDP) and China (exports are 22% of GDP), should be done very carefully with a view to determining closely how each company is affected by protectionism.

“The trick to stock picking is to identify those companies which you like, regardless of what’s happening in the world. So if we develop the view that protectionism is going to rise and be very, very disruptive, clearly we want to avoid companies which will be exposed to that. But it’s very difficult working through this,” says Tim Orchard, chief investment officer, Asia Pacific ex-Japan of Fidelity International.

Orchard warns investors against getting caught up in evaluating a company based solely on how it may or may not be affected by protectionism, and encourages using other factors, such as the company’s medium and long-term response to the market environment, as well as corporate governance, among other factors.

“For example, if you think about the forward tax (a tax imposed on producers but passed on to consumers, that has been proposed by Trump) you can take a company, and you can figure out in a very static way how that company is going to be affected. But you also need to see how that company is going to respond. It’s incredibly complex,” Orchard says.

In any case, Asia ex Japan equities are expected to catch up with developed markets in 2017, given the region’s attractive valuations and structural reform progress in key markets such as China and India.

“We believe Asia ex Japan equities could outperform in 2017, not only due to attractive valuations, but also because the region has made decent progress in its reform agenda. Asia ex-Japan equities have underperformed since 2011, as investors focused on declining commodity prices, the strong US dollar and the potential fragility of China’s credit-driven growth. Valuations remain below long run averages,” says Orchard.

Concerns have also been raised over Asia’s ability to cope with the spectre of higher US interest rates.

“In previous rate hike cycles, Asian markets on average have performed well in a rising US interest rate environment, which reflects the fact that higher rates typically reflect robust global growth. Although this cycle may exhibit different characteristics, we believe the US Federal Reserve is likely to raise interest rates at a measured pace in order to sustain the momentum of the economic recovery,” Orchard says. 


26 Jan 2017

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