While Brexit or Britain’s breakaway from the European Union is seen to intensify global risk aversion, the Philippines—along with a handful of Asian markets—remains attractive to equity investors, investment experts from British banking giant HSBC said.
“We believe Asia will stay relatively resilient to withstand the Brexit headwind, and we also believe that relatively limited direct trade of Asia to the UK should provide cushion in terms of market drawdown driven by this external shock,” Fan Cheuk Wan, HSBC head of investment strategy, said in a recent press briefing.
Following the British memorandum that favored Brexit, HSBC slashed overall equity allocation for equities in line with the shift to a more “defensive” strategy.
However, Fan said HSBC was still upbeat on Asia.
And within Asia, it had an “overweight” recommendation on China, Singapore, Indonesia and the Philippines.
The three domestic-driven economies—the Philippines, Indonesia and China—are seen better positioned to withstand the external headwinds, while Singapore is also appealing because it is the highest yielding equity market for Asia, Fan said.
“Overweight” is a recommendation to load up on equities relative to a certain benchmark while “underweight” is a recommendation to sell.
HSBC head of Asia-Pacific equity strategy Herald van Linde said while Philippine equities were still expensive, the overweight rating was “warranted by the fact that profitability is still good” against the backdrop of a stable underlying macroeconomic environment.
Remittance flows continued to act as stabilizer for the economy, he added.
HSBC expects Philippine corporate earnings to grow by around 9 percent this year, slightly down from the 10 percent forecast in January, when the bank first issued its overweight recommendation on local equities.
Fan said asset prices in the eurozone could further go down due to contagion risks.
As such, HSBC cut its allocation for European equities to underweight from neutral, citing the political risk premium.
On the other hand, HSBC increased its allocation for US equities, deemed a “safer” alternative in terms of equity exposure.
With the reduced allocation for Europe and the UK, HSBC’s overall positioning in the developed market has been cut down.
As an asset class, HSBC also cited its allocation for emerging markets to neutral from slight overweight, noting that the expected strengthening of the US dollar would likely cap the performance of emerging market equities, Fan said.
By region, Fan noted that Eastern European emerging markets were also more vulnerable to Brexit, while Latin America was also seen to face headwinds as the near-term strength of the US dollar is seen to gnaw on commodity prices, in turn hitting hard commodity-exposed Latin American markets.
Meanwhile, HSBC is also underweight on Japanese equities as the likely appreciation of the yen is seen making Japanese exporters less competitive in the global marketplace.
As Europe adjusts to Brexit, HSBC expects investors to flock to safe haven assets including Japanese yen, Swiss francs, US dollar and gold.
For Asia, Van Linde said the region was unlikely to suffer much from the trade and financing channels.
However, he said Southeast Asia may be susceptible to risk aversion.
But unlike countries with current account deficits, Van Linde said the Philippines—given its current account surplus—should be less vulnerable to changes in investor sentiment.