The Multi-Asset Perspective: June 2020
The Sino-U.S. tension and potential restriction on tech know-how creates uncertainty. Kelly Chung, Senior Fund Manager, examines the post-pandemic economic recovery and expects a prevailing sentiment among investors to be cautious.
China / Hong Kong Equities
The recovery from the COVID-19, especially in China, is so far better than feared initially, with most of the economic activities resumed 70-90% already. Some sectors even restored to a YoY growth, not only from a pent-up demand. Consumption is on a healthy recovery path. They altogether provide a positive backdrop for the equity market. However, as the Sino-U.S. tension creates uncertainty, the market tends to be sideway as investors remain cautious. Also, the situation in Hong Kong adds to the cautious stance of investors.
The fiscal and monetary policies that came out during the National People’s Congress seemed to fall short of market expectations as the officials did not announce a large scale of the stimulus package, and only budget is expanded. Recently, the real financial condition in China is tightened, and the rising margin trading maintenance ratio would cap the equity market upside. However, the pandemic recovery turned out to be faster and better than initially feared.
Asia ex-Japan Equities
The market faces an expectation of a V-shape recovery in the U.S. With the continued liquidity support from the Federal Reserve, the U.S. dollar has softened, which helped mitigate the capital outflow out of Asian equities, especially from Southeast Asia. However, the economic recovery in the Southeast Asian countries remains weak. We continue to prefer North Asia, especially Taiwan and Korea.
Emerging Market ex-Asia Equities
Emerging market (ex-Asia) is highly sensitive to the oil and other commodities prices. With an expected low demand on industrial commodities, Emerging Europe and Latin America will continue to be out of investors’ favor. Also, the COVID-19 situation in countries such as India and Brazil would remain acute in the near-term.
As mentioned last month, Japan lagged in the previous relief rally and managed to catch up significantly in May. However, the post-rally valuation becomes demanding for limited improvement in fundamentals. The resumption of economic activities needs to be closely watched as most of the areas have been reopened.
Asia Investment Grade Bonds
Investor sentiment on 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
After the Fed’s expansion in the bond purchase, even including non-IG rated fallen angels, volatility in the global high yield space has quickly normalized. The credit spread in Asian HY has swiftly tightened. With a recovering momentum in the financial and industrial equities, a more positive outlook is expected in the Asian HY space.
Emerging Market Debt
EM debt’s valuation is attractive, given the tightening in other bond sectors. With stabilized volatility in the commodity markets and moderated CDS in several EM countries, investor demand will likely return, given the attractive yield spread.
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.