Speaking at a press briefing on Tuesday, he said significant reforms are taking place in China, India and Indonesia that are opening the respective economies and improving the business environment.
China, for example, has exited deflation because of those reforms, said Swan, who is also responsible for managing several regional equities portfolios.
“But what we are seeing in 2016 is the acceleration of these reform processes into 2017.”
Swan said that over the last 12 months, he has added exposure to Indonesia and Southeast Asia in general.
“We still like India,” he said, acknowledging that it may go through some short-term challenges because of the country’s recent move to demonetise its currency. For example, the demonetisation has caused sales margins to decline, particularly in small-to-medium size businesses and in the retail space.
In North Asia, he is now underweight, particularly in tech-heavy markets such as South Korea and Taiwan, given the slowdown in the technology and smartphone cycles.
In China, the firm is overweight. “There is incredible dispersion in this market and a lot of change, whether it is driven by regulation or reform or technology. [In China,] we could find fantastic opportunities, and it represents a large part of our portfolio.”
Both the Blackrock Asian Dragon Fund and the Blackrock Asian Growth Leaders Fund’s top country exposure is in China as of end-October, representing roughly 33% and 30% of their portfolios, respectively, according to their fund factsheets.
Meanwhile, investors in Asia are still “very conservative or defensively positioned” and valuations are low. “Investors are still underweight the region because of concerns particularly about China and its debt story.”
The near-term risk for Asia is “a continued strengthening in the US dollar which puts potential issues such as renminbi devaluation risk back on the table as well as allowing less policy flexibility amongst Asian central banks”.
Reforms and fixed income
The firm remains constructive on Asian fixed income due to fundamentals and attractive valuations, according to Neeraj Seth, the Singapore-based head of Asian credit.
The strong reform agenda in Asia is creating a positive environment for fixed income, which is critical for long-term investors, he said. “Over the course of three to four years, the macro fundamentals look a lot more stable in most of the Asian economies.”
In terms of specific countries and sectors, the company continues to like India and Indonesia, particularly in investment-grade quasi-sovereign sectors. “If you look at the government bond market across the globe between emerging and developed markets, India has significantly outperformed over the last month,” he said.
He is neutral on China overall. In specific key sectors, such as real estate, he is neutral. However, he takes a positive view on higher quality state-owned enterprises and technology companies.
Seth said the firm will be monitoring the shift from monetary to fiscal spending policy in the US, which could result in inflation and a faster pace of rate hikes than the market expects.
“Even though the markets are concerned about faster pace of rate hikes than the Fed’s current guidance, it is still not the base case. We would expect the Fed to raise rates by 25bps in December but stick with the gradual approach thereafter.
“Faster than expected policy moves and a strengthening US dollar will negatively impact on emerging markets through the capital account channel keeping pressure on outflows.”
