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What is Unigestion’s Salman Baig keeping one eye on in the second half of 2019?

06 August 2019

With the first half of the year now behind us, FE Trustnet has asked several multi-asset specialists how they expect the rest of 2019 to unfold and how they are positioning for it.

By Eve Maddock-Jones,

Reporter, FE Trustnet

After a difficult end to 2018, the first half of this year saw markets return to growth as several of last year’s headwinds seemed largely resolved.

However, as we have seen in recent days, markets remain subject to the whims of geopolitics and macroeconomic trends.

As such, FE Trustnet has spoken with several multi-asset managers to find out what they are most concerned about and how they are positioning for the second half.

Salman Baig (pictured), investment manager at Swiss asset manager Unigestion, said that of all the macro challenges facing markets right now, his biggest concern is the US China trade war, particularly at a time of growth concerns in the Chinese economy.

“We see China’s slowdown and the trade war and basically what that means for us is that we have a pretty light allocation to China,” he said. “We’re roughly neutral, sometimes it can swing slightly overweight or slightly underweight but at this point we’re pretty neutral.”

This will have come in handy in recent days as US president Donald Trump’s administration labelled China a “currency manipulator” amid ongoing challenging trade talks.

As a result, markets have faltered following a strong start to the year fuelled by the prospects of a Federal Reserve rate cut that was announced at the end of July.

Teetering trade talks notwithstanding, Baig said the concerns surrounding the slowdown in the Chinese economy and structural changes have made him more cautious.

He said: “In terms of China’s growth, I think our view is that it’s going through four pretty big transformations.

“One of those challenges by themselves would be quite difficult and they’re doing all four of them at the same time.”

The challenges facing China’s domestic economy according to Baig, are the transition from growth linked to heavy infrastructure investment to a more consumption-based economy driven by the growing Chinese middle class, a further transformation.

Baig also highlighted the considerable sums owed by the private sector and its impact on the economy. Finally, the multi-asset manager said authorities are transforming their credit economy whilst trying to simultaneously open themselves up to more foreign investment.

“Long-term, China’s policy-makers have a lot of weapons and tools at their disposal for these four challenges and they seem to be well aware of what the difficulties are,” he explained. “Nobody can say that it’s going to be perfect, but I think that they have a pretty good chance of sorting it.”


 

While these transformations are achievable, said Unigestion’s Baig, it is placing intense pressure on the Chinese economy and, as such, it is little surprise that growth has slowed down.

“They want to support growth but make sure it’s the right type of growth. Parts of the economy need to be slowed down, but they have to be careful to not let those parts constrain overall growth too much.” .

"Unless China really falls off the rails, which is not our base case scenario, we think more investors will shift their asset allocation to there.

“We want to be invested, to a degree. So, long term yes [it is a compelling story], but short term there are some key risks and we remain cautious.”

Real GDP growth (annual per cent change)

 

Source: International Monetary Fund

However, the impact of the trade talks should also not be written off, said Baig. While Chinese authorities have an element of control over the domestic economy it has little control over the US president and his pursuit of a tougher line on trade.

“It’s a bigger concern than the China slowdown, for a couple of reasons,” the multi-asset manager said. “Short term for us the key risk is the US-China trade war, that’s the big question and we are somewhat sceptical that we will get the sort of deal that people have been hoping for.

“Unlike the China slowdown which introduces some risk in terms of growth, the trade war is really about uncertainties and we think it is helpful to distinguish between risk and uncertainty.”

To prepare themselves for this, Baig said, they have taken steps to de-risk the firm’s flagship multi-asset fund: Uni-Global Cross Asset Navigator.

“For us risk is inherently multi-dimensional,” he said. “So, while we thought that the macro and valuations were quite supportive, we knew that there was no guarantee, so we wanted some protection.

“As the year progressed the portfolio has shifted away from a ‘buy everything, own all assets’ beta strategy more towards a ‘carry strategy’.”


 

A ‘carry strategy’ or ‘carry trade’ involves borrowing at a low interest rate and investing into an asset which should provide a higher rate of return. This has become particularly relevant recently as the Federal Reserve has begun to cut rates and remain low elsewhere.

As such, Baig said the fund will be looking for potentially higher yielding debt to capture that spread. At the same time, he added, the fund will be maintaining a downside protection in equities.

“Economies don’t hover around potentials for extended periods of time,” he concluded. “Pressures push an economy one way or another to either reaccelerate or dip into a recession

“We’re at a state where the economy could swing either way, at a time when central banks are easing but that effectiveness is reduced.

“We can’t call which way it will swing. That’s where a lot of our concern come from.”

Unigestion’s four FE Crown-rated, $364.5m Uni-Global Cross Asset Navigator targets smooth returns of cash plus 5 per cent – gross of fees – across all market conditions over a tolling three-year period.

Performance of fund vs benchmark over three years

 

Source: FE Analytics

Over the past three years, the flagship multi-asset fund has made a total return of 23.48 per cent against a return of 27.69 per cent for the Libor US dollar three-month plus 4 per cent benchmark and a 4.40 per cent gain for the average IA Targeted Absolute Return peer. It should be noted, however, that the IA Targeted Absolute Return sector is home to a range of strategies. The fund has an ongoing charges figure (OCF) of 0.75 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.