HONG KONG (Reuters) - Synchronized global growth and the likely slow path that the U.S. Federal Reserve will take in raising interest rates and trimming its balance sheet means the market environment “does not get much better than this,” the CIO of insurer AIA Group (1299.HK) said.
Speaking at the Reuters Global 2018 Investment Outlook Summit in Hong Kong on Thursday, Mark Konyn said this reduced the risk of major disruptions in emerging markets, where consumption growth will be a key investment theme for next year.
“The (Fed) tightening is going to be very gradual ... that’s pretty benign given that we have synchronized growth globally still,” Konyn said. “It doesn’t get much better than this.”
Any inflation surprise or an escalation of geopolitical risks in the Middle East and the Korean peninsula might disrupt the “Goldilocks” market environment, but that was not his central scenario.
Also, any setbacks in equity markets might be offset by a “tremendous” amount of cash reserves that investors have and could be redeployed at lower prices.
One asset class which could suffer from higher interest rates is U.S. high-yield debt but that doesn’t feature in AIA’s universe of assets. The firm has been cutting exposure to other rate-sensitive assets, however, such as real estate investment trusts and high-dividend paying stocks and Konyn expected that trend to continue into 2018.
AIA’s equity exposure, typically 8-9 percent of any of its portfolios, will be positioned to capture the growing domestic demand and will be less sensitive to global trade than it has been in the past.
Technology, which has been an outperforming sector this year, will continue to grow in 2018, also driven by domestic demand, Konyn said.
“Economies are in good shape - cash levels at individual and corporate levels are reasonably high, so that is the natural driver going forward - domestic consumption,” he said.
In fixed income, which for most insurers forms the bulk of the assets, AIA will look to increase its exposure to China, given its growing business there, and seek opportunities to add corporate debt to its portfolio of central and local government debt and bonds issued by state owned companies.
China’s growth is likely to slow by roughly 25 basis points per year in the foreseeable future, but that growth should be of a higher quality as efforts to curb excessive financial risks bear fruit.
“Our view is that we’ll continue to go through this soft-landing (in China),” Konyn said.
“Debt levels have grown alarmingly but they’re still manageable.”
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Additional reporting by Jennifer Hughes; Editing by Muralikumar Anantharaman