As the U.S. trade war escalates tensions globally, Societe Generale advised “go domestic” in its Asia equity strategy.
“In Asia ex-Japan as a whole, the earnings growth contribution has shifted from resources/technology to consumer/financials, which are more domestic in nature,” it said in a strategy note this week. “This has shaped our investment recommendation towards these two sectors (financial and consumer) and towards markets sensitive to domestic demand (China, Indonesia, India and Thailand).”
It noted that it was assuming that the U.S. trade war would essentially be centered on China and wouldn’t disrupt its expectations of a gradual slowdown in the mainland economy.
“This implies that in Asia the casualties will essentially be among Chinese names with collateral effects on North East Asia technology,” it said.
Societe Generale advised switching out of South Korean equities and into India.
“Korea equities have been supported by the remarkable earnings recovery since the turn in the export cycle. This has paused so Korea hardware technology now runs the risk of being caught in the crosshairs of the belligerents,” it said. “In the current environment, we should position onto the more domestic-oriented markets, such as India, where earnings finally show signs of life and domestic flows mitigate foreign outflows.”
It also tipped going long on a basket of China tourism plays.
“There may be a trade war, but the broad picture in China is one of rebalancing the economy from investment to consumption,” it said, noting that increasing tourism may have contributed to China’s swing to its first current account deficit in 17 years in the first quarter.
It also tipped going long a basket of Japanese domestic stocks and shorting the TOPIX.
“The trade we prefer is to be long a basket of domestic stocks whose components have been selected among TOPIX 100 members with a low beta, a low historical correlation with the dollar/yen, and a relatively low international exposure,” it said.
It added that it has also been long Japan auto and short Japan electrical appliances, citing a huge valuation gap among the two top sector exporters. But it noted, “this trade makes sense only so long as the toughening stance on trade is confined to China.”