2Q18: Mind the Bends
- Stay with risk assets despite higher volatility
- Seek income-generating assets for resilience
- Global Technology, Financials, and Asia to pay off
The first quarter saw a sudden shift in market sentiment – from optimism in January to extreme caution in February and March, on the back of a potentially more hawkish Federal Reserve and growing concern of a global trade war.
But before jumping the gun and concluding that the nine-year bull has turned into a bear, let us look at the fundamentals squarely.
One, while equities have seen a meaningful correction during the recent turbulence, credit markets are resilient. This is reflected in stable corporate yield spreads, which point to a continual low default rate environment. Two, bear markets have historically taken place during periods of recession. Today, the world is enjoying synchronised growth and the corporate earnings outlook is upbeat. Three, even with growing trade tensions between the US and China, our base case is for an eventual resolution – albeit through heightened negotiations.
We therefore stay constructive on risk assets of equities and corporate bonds, even though it is likely the days of low volatility are behind us. Bouts of fear – over a quicker normalisation of interest rates, or a tit-for-tat response to rising US protectionism – could prove destabilising in the short term.
How should portfolios navigate these market gyrations?
We believe a targeted and long-term investment approach is paramount. Gaining exposure to income-generating assets is essential in ensuring portfolio resilience, so stay with BBB/BB-rated corporate bonds and Asia dividend equities. In our portfolios, we like Asia and Global Technology stocks, given the longer-term tailwinds at their backs. We are also positioned in high-quality companies in the Global Financials and Consumer Discretionary sectors, as well as European companies that are beneficiaries of robust domestic recovery in Europe.
For portfolios that are under-invested, we recommend adding exposure to the above themes. As always, it is imperative to maintain a well-diversified portfolio, with a central allocation commensurate with your risk profile.
In addition to views on macroeconomics, rates, and currencies, we have included Hedge Funds, Sustainable Investing and Petro-CNY themes, which in the longer term will have profound impact on global capital flows.
Hou Wey Fook, CFA
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