Multi-Asset Perspective – Aug 2023
Our investment director and head of Multi-Asset, Kelly Chung, shares her latest insights on different asset classes. In China, there was a significant change in its policy direction, with officials becoming very supportive of the economy on all fronts, particularly on property, consumption, infrastructure, and private sectors.
Elsewhere in Asia, with some markets rallying significantly in recent months, such as Korea and Taiwan, driven by the momentum of AI, some profit-taking is likely in the near term. Valuations are also getting above average for some markets.
China / Hong Kong equities
- In July, the Fed lifted rates by 25bps, which was in line with market expectations. Fed Chairman Jerome Powell affirmed the possibility of future rate hikes, noting that while inflation has cooled, it remains above the Fed’s target of 2%. Forward guidance has become more difficult, and the market will likely be more volatile, given the differing views of the interest rate hike path. The market is equally split between expectations of one more rate hike or the Fed being done with the rate hike cycle.
- Separately, Fitch recently downgraded the US sovereign rating from AAA to AA+. Together with the increased size of Treasury Bill issuance, Treasury yields moved up, and the US dollar strengthened. This short-term squeeze in global liquidity will likely cause investors to be more cautious in the near term. However, since the market expects four rate cuts next year, Treasury yields should peak after this short-term spike.
- In China, there has been a significant change in the policy direction following the July Politburo meeting, with officials becoming very supportive of the economy on all fronts, particularly on property, consumption, infrastructure, and private sectors. This is the first time since 2018 that a clear message was directed from the top-most official. There is also a positive message toward local debt resolution and a boost to the capital markets.
- Chinese officials’ positive stance has caught the market by surprise. We expect the details of the stimulus will come in the next several months. The economy is bottoming, and we expect a meaningful growth pick-up in the fourth quarter.
- So far, foreign investors have not participated in the rally since they are still skeptical and waiting for the details.
- Onshore investors are more optimistic about the change in policy direction and believe the economy is about to bottom out.
- Northbound flows have turned positive since the Politburo meeting. Sector rotation has also started, with investors taking profit from AI-related sectors and adding back to traditional sectors to position for the potential stimulus.
Asia ex-Japan equities
- As the recession risk in the US is receding and pushing out further to the next year, the backdrop for Asian equities has improved. Also, the peaking US dollar in the current rally should help Asian equities.
- However, with some markets rallying significantly in the last quarter, such as Korea and Taiwan, driven by the momentum of AI, some profit-taking is likely in the near term. Valuations are also getting above average for some markets after the rally.
Emerging markets ex-Asia equities
- The stronger-than-expected US market is favorable for emerging markets. However, the tightening in global liquidity, given the higher Treasury yields, made investors become more cautious in the near term.
- On 28 July, the Bank of Japan (BOJ) pledged to conduct its yield curve control “with greater flexibility”. While maintaining the 10-year Japanese government bond (JGB) yields at around 0-0.5%, the BOJ raised its regular fixed-rate JGB purchase level from 0.5% to 1.0%. Following the announcement, the Japanese yen rallied immediately, causing the market to correct.
- However, the BOJ performed two unscheduled bond purchases on the following Monday and Thursday when the 10-year JGB yields went above 0.6%, preventing yields from moving closer to 1%. The dovish moves caused the Japanese yen to depreciate significantly.
- As JGB yields keep rising and inflation continues to be elevated, the BOJ will be more pressured to commit to its yield curve control policy. This has increased the possibility that the central bank may need to officially move up the yield curve control band or totally abandon it.
- We believe there will be more near-term volatility in the local currency and the Japanese equity market before the next BOJ meeting in October.
- On the other hand, Japanese earnings have continued to beat expectations with improving ROEs and margins. Dividends and share buybacks have also increased. This is positive for the market. However, since the rally in the second quarter has already largely priced in these positive factors, the recent volatility in the yen and JGB yields may cause some market correction in the third quarter.
Asian investment grade bonds
- Recent new Asia investment grade bond issuance is very active – and the demand is strong. Credit spreads keep tightening. However, Fitch recently downgraded the US sovereign rating to AA+ from AAA. Together with the increased size of Treasury Bill issuance, Treasury yields moved up. In the near term, this short-term squeeze in global liquidity will hurt investment grade bonds from a duration perspective. However, since the market expects four rate cuts next year, Treasury yields should peak after this short-term spike.
Asia high yield bonds
- As some of the remaining private Chinese developers’ liquidity is under stress, the sentiment in Chinese high yield bonds retreated quickly. However, with improving fundamentals, other Asia high yield bonds performed well, including Macau and Southeast Asian bonds.
Emerging market debt
- More stable EM currencies and CDS supported emerging market bonds. However, the narrower spread between EM bonds and US credit has caused the market to become less attractive.
- Momentum is getting weaker as the short-end Treasury yield is very attractive. However, with the rate hike peaking, the price of gold will remain supported.The asset class also remains a good hedge against heightened geopolitical risks.
- Multi-asset offers lower volatility compared to traditional single-asset or balanced portfolios. However, the correlation between risk assets, such as equities, credits, and commodities, has recently increased dramatically. In an uncertain environment with low yields, income becomes an essential source of return for investors.
|July 2023 performance||YTD performance|
|MSCI AC Asia ex-Japan Index (in USD)||6.13%||9.34%|
|MSCI China Index (in USD)||10.76%||4.71%|
|CSI 300 Index (in CNY)||5.35%||5.83%|
|Hang Seng Index (in HKD)||7.16%||4.22%|
|Taiwan Stock Exchange Index (in TWD)||2.43%||24.72%|
|MSCI Taiwan Index (USD)||0.78%||20.87%|
|JPM ACI China Total Return Index (in USD)||-0.35%||0.86%|
|JPM Asia Credit Total Return Index (in USD)||0.27%||3.19%|
Source: J.P. Morgan, MSCI, Morningstar, Data as of 31 July 2023
The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable as of the date of presentation, but their accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited.