The Multi-Asset Perspective: July 2020
Upbeat macroeconomic data, expectation of a V-shaped recovery and earnings downward revision to bottom collectively provided a tailwind to global markets, where saw a strong June performance. Kelly Chung, our Senior Fund Manager, suggests that China equities continue to remain in favor, amid the broadening investor sentiment and risk appetite.
China / Hong Kong Equities
Global macroeconomic data, in particular of China, came out to be stronger than expected for May and June, consecutively. Also, earnings downgrade has bottomed as analysts look forward to a healthy consumption and industrial recovery in 2021. Increasingly, more sectors delivered year-on-year growth and more optimistic guidance for the rest of the year and next year. With valuation not yet demanding, money started to flow back to Hong Kong as risk appetite picked up. Transaction volume stands at high levels as institutional investors are closing the underweight in Hong Kong/China equities. On the other hand, the resurfacing of the virus cases hinders the Hong Kong domestic sectors.
With the domestic housing market recovered quickly to a massive growth in price and volume, the wealth effect boosted investor sentiment and risk appetite. The increased retail participation in the A-share market is evident by the significant increase in brokerage account opening and margin financing. The looser financial condition supports the equity momentum.
Asia ex-Japan Equities
The USD continues to weaken as the yield curve control is expected to be implemented by the U.S. Federal Reserve. Meanwhile, the Fed is expected to remain dovish until inflation well passes the target. As a result, Asia benefited from the weakening USD, with capital flowing back to the region. The tightening of Asian credit spread served as a positive indicator for Asian equities. The recovery in the base metal prices lent another support to the industrial and material sectors in Asia.
Emerging Market ex-Asia Equities
The emerging market (ex-Asia) is highly sensitive to commodity prices. With base metal prices seeing a strong recovery as macroeconomic data around the world is more potent than expected, the prolonged capital outflow from EM is ending. Tightened EM credit spread also lends support to the re-rating of emerging market equities.
The resurgence of virus cases after the reopening of the economy is worrying. Lack of improvement in fundamentals and demanding valuation, the backdrop is not favorable for Japanese equities.
Asia Investment Grade Bonds
Investor sentiment in the IG bonds continues to be upbeat with the record inflow to the asset class. The spread between the Asian and U.S. IG issues continues to tighten, given a strong yield-searching demand amid the ample market liquidity.
Asia High Yield Bonds
The credit spread in Asian high yield issues continue to tighten, given stronger earnings sentiment in the region. With a recovering momentum in the financial and industrial equities, a more positive outlook is expected in the Asian HY space.
Emerging Market Debt
The strong recovery in base metal prices continues to lend support to the credit spread tightening in EM debt. However, after a strong rally in Q2, valuation is no longer as attractive as before. Also, with an increased risk appetite, capital may instead start to flow to emerging market equities.
Gold has been a good hedge against uncertainties. The massive monetary easing and fiscal deficit will be adverse to the U.S. dollar and reflationary in the longer term, which supports gold demand. However, with risk appetite picking up and yield curve steepening, the momentum in gold may somewhat diminish in the near term.
Multi-asset offers a lower volatility level compared to a traditional single asset or a balanced portfolio. 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 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.