Asian equities are in a good position to combat a strengthening US dollar and any trade barriers president Trump is likely to implement, according to Schroder’s Matthew Dobbs (pictured). 
The manager, who runs several portfolios for Schroders including their Asian Alpha Plus, Asia Pacific and Oriental Income funds and trusts, says he doesn’t have a strong view on the dollar currently, despite many investors worrying that a further rise will impact emerging market regions.
In fact, Dobbs says many Asian countries were shocked into action during 2013’s Taper Tantrum, when then-Federal Reserve chairman Bernanke announced the decision to gradually reduce quantitative easing. He says as a result emerging market economies are much stronger and more resilient to any potential headwinds than they have been before.
“I don’t have a very strong view on the dollar. I think one of the things that has been interesting over the last 10 years has been that, when the dollar goes up, sterling tends to go down, so actually the realised volatility of Asian stock markets for a UK-based investor has been materially dampened by that,” Dobbs explained.
“This has been nice because we have about half of our money in income portfolios where we’re just trying to deliver a decent income for people who want it alongside some growth. Dividend growth in Asia has been twice that of the UK and you have some currency benefit.
“Obviously, a stronger dollar is usually associated with rising interest rates as being a difficult time for emerging markets and – surprise, surprise – Asia is now about 90 per cent of emerging markets.
Performance of US dollar vs index over 20yrs
Source: FE Analytics
“Actually, I would say Asia at the moment is in pretty good shape for a stronger dollar. We were given a real jolt in 2013 by the taper tantrum, it really put the lid on irrational exuberance in a lot of countries.”
As a result, the manager says the foreign exchange and fiscal positions of many Asian countries are a lot stronger than they were three years ago and have come a long way since the Asian financial crisis of 1997.
While many investors are particularly concerned about China’s ability to navigate a strengthening dollar and US rate hikes given its dollar-denominated debt build-up, Dobbs argues that the People’s Bank of China has successfully stimulated the economy and added some inflation into the system. The positive impact of this is shown through the country’s recent pick-up in profits.
“Yes there are capital controls in China, but did you know that you can’t have a Singapore dollar offshore account from Singapore? We all think of Singapore as the great open economy, you can’t own Singapore dollars outside of Singapore,” he pointed out.
“Asian countries will control their own currencies; it’s their currency, they will do what they want with it. So I think on the whole, China is probably okay unless there’s some very severe tightening.
“In relation to bond markets, who knows how much higher bond yields really will go? I don’t know where a lot of inflation is going to come from in the world right now, quite frankly.”
The impact of a strong dollar on China’s balance sheet isn’t the only concern voiced by investors, however. China, along with Mexico, may fall victim to Trump’s proposed trade restrictions, which would see a hefty 45 per cent tariff placed on its imports to the US.
“Obviously, there was a big sell-off in export names and the investment banks put together packages which you could short,” Dobbs said. “Subsequently, over the next two months, they went up about 20 per cent.
“Most of the exporters in our portfolios, which we have had for a while, did extremely well once they had dusted themselves down because I think people came to the conclusion that these are incredibly complicated supply chains.
“Trump may think he’s going to be making smartphones in Nebraska, but they’re a long way from that. Who in America is going to employ a million people – which is what Hon Hai does – assembling smartphones?”
The manager believes the US will suffer a greater blow from trade tariffs imposed in China than China itself, given many manufacturing firms across emerging Asia experience higher growth levels than those in the US.
“They know how to play this. Asia has a lot of capital; a lot of Asian, privately-run companies are managed by bright people and, unlike the public companies run by the state, the private companies are in great shape. Their balance sheets are in great shape,” he continued.
“Who is going to go bust as a result of these border tax adjustments? Have a quick look at bricks and mortar retailers in the US and look at their market caps, look at their debt, look at how many people are employed, then think how many of them voted for Trump. Because I reckon that quite a lot of them did.
“They didn’t vote for the bankruptcy of their own country. Because if you put 20 per cent on the cost of anything you import into America… There are some bright people in Washington. Some of them worked for Goldman Sachs. I think we will see a lot more pragmatism here.
“There’ll be a lot of volatility. I’m prepared for volatility and that’s the sort of time you buy Asia. If investors don’t want Asia and they sell everything they have, that’s when you buy it.”
Since its launch in November 2007, Dobbs’s four crown-rated Schroder Asian Alpha Plus fund has returned 165.01 per cent compared to its sector average and benchmark’s respective returns of 87.87 and 93.63 per cent. It has done so with a top-quartile Sharpe ratio (which measures risk-adjusted returns) and a third-quartile maximum drawdown (which measures the most money lost if bought and sold at the worst possible times).
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The £596m fund has a clean ongoing charges figure (OCF) of 0.96 per cent and yields 0.97 per cent.