Multi-asset perspective – August 2021
Markets were down in Asia, especially for Greater China markets, as the regulatory crackdown on various sectors in China has dampened investor sentiment. Meanwhile, the pandemic continues to be a key risk in markets, as the spread of the Delta variant may delay economic recovery.
China / Hong Kong equities
Market sentiment has been hampered by the increasing regulatory oversight on various sectors, especially in the internet and education sectors. Although valuations have become appealing after the correction, most investors would rather remain on the sidelines amid the regulatory uncertainty.
Flows have steered towards sectors that are more supported by the government. Given the defensive nature of the investors, defensive sectors such as utilities, telecom and local Hong Kong stocks are expected to continue to outperform.
Economic growth in China has clearly peaked. With the Delta variant surging among different parts of the country, the market is concerned that a slowdown in China would be more imminent for the rest of the year.
Tourism and consumption would be hurt during the mid-autumn festival and golden week in October. Investors should focus on sectors that would benefit from the potential targeted easing policies that may be announced towards the fourth quarter.
Asia ex-Japan equities
Investors are concerned about the tighter liquidity environment as the Fed starts to consider tapering, especially after a very strong payroll number in July. Inflation expectations have also rebounded as wage growth continued to rise.
The technical strength in the US dollar has also hampered the performance of Asian ex-Japan equities.
Upward earnings revisions have peaked in the region, with the risk of having downgrades later in the year after first half results are reported. Investors will remain to be cautious.
Emerging market ex-Asia equities
With the Delta variant spreading across different countries, concerns over a delayed recovery have hampered the demand outlook on oil. Together with the gradually increasing supply, oil prices have corrected. Although countries such as Brazil and Russia are still expected to enjoy economic recovery for the rest of the year, investors have become more cautious about emerging markets in general.
Investor sentiment should have bottomed after the conclusion of a successful yet closed Olympics. The economic surprise index has stabilized, indicating that the market has turned more positive on the country’s economic recovery. Economic data has also beaten expectations and foreign net flows have come back to the Japanese equity market.
Asia investment grade bonds
With the strong July payroll number in the US, the recent flattening of the Treasury yield curve will be challenged with the rebound in inflation expectations and increasing tapering concerns. However, with the weakness in the equity market, a strong appetite for Asian investment grade bonds will remain.
Asia high yield bonds
The liquidity concerns on some of China’s property companies have caused the Chinese property high yield bond space to correct further.
With a risk-off sentiment, indicated by investors’ rotation to the defensive areas of the market, Asia ex-Japan high yield credit spreads have widened. We expect that it will take time for sentiment to pick up for spreads to tighten back.
Emerging market debt
The weaker oil and commodity prices will hurt the outlook of emerging market bonds. However, as the demand for yield continues, emerging market bond spreads will remain stable.
Gold is likely to move sideways as the US dollar has tactically strengthened. However, the valuations of Gold are becoming attractive versus other commodities. Over the long term, Gold remains a good hedge against geopolitical uncertainties and would benefit from easing fiscal policies.
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 increased dramatically recently. In an uncertain environment with low yields, income becomes an essential source of return for investors.
The author is Kelly Chung, our Senior Fund Manager.
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