Bonds and high-yield equities still hot favourites for second half, say asset managers
The global financial market has entered a strange phase, with stock markets shrugging off the uncertainties after the Brexit vote to reach new highs, as the continuous drop in bond yields indicates that investors are seeking absolute returns to avoid risk.
Analysts said a diversified bond portfolio may still be the best choice in the third quarter despite the slippery slope of bond yields, as well as high-yield equities and gold.
Will Leung Chun-fai, head of investment strategy for wealth management at Standard Chartered, said bonds are likely to deliver positive absolute returns and better rewards compared to equities and commodities in the second half of the year.
“We prefer corporate bonds over government bonds,” Leung said. “US investment grade corporate bonds are our top pick due to the attractive combination of quality and reasonable yields on offer.”
Asian US dollar-denominated bonds are the next best, followed by developed market high yield bonds, Leung said.
Although the bond market rally after the Brexit vote has reduced bond yields compared to the start of the year – and some bonds are delivering negative yields nowadays – Leung said lower global economic growth expectations, geopolitical risks and easy monetary policy are factors likely to support global bonds and keep yields close to current levels.
For investors in favour of a moderate strategy, Standard Chartered suggests 43 per cent of assets be allocated to fixed income, 33 per cent to equities, 7 per cent on commodities, including crude oil and gold, and the rest on alternative tools and as cash.
Hui Tai, JP Morgan Asset Management’s Asia chief market strategist, recommends Asian bonds and emerging market debt, given the comparatively higher return among fixed income products and signs that the US dollar will peak and depreciate in the coming two quarters.
Amid the negative interest rate environment, choices for stocks or bonds have been harder to make.
State Street head of strategy and research for Asia Pacific, Thomas Poullaouec, said Japan has become its least preferred equity market, and the advisory firm is also cautious on the European equity market, which at the start of the year was its regional favourite. It is overweight on gold and US real estate investment trusts.
There are still investable assets in the stock market even though volatility remains high, said Louisa Fok, executive director of UBS’s Chief Investment Office for wealth management.
She is overweight on US equities, given the country’s economic recovery is the best among the world’s major economies.
“The recovery of companies’ earnings growth in the second quarter has beaten our expectation. We think this trend will continue in the coming two quarters,” Fok said. “We are also overweight on high-yield stocks in Hong Kong, such as local property and telecommunication sectors.”
An average dividend yield of 3 to 4 per cent in these sectors is likely to be maintained, or even increase in the coming two quarters, she added.
For investors seeking extra returns in the second half, China’s “new economy “ related sectors may be the best choice, as they appear unscathed from the global economic turmoil, Fok said.
Jason Sun Xianbing, chief China Strategist at Citigroup, said information technology (IT) and the consumer discretionary sector, such as jewellery and other non-essentials, would generate high earnings per share in the coming 12 months.
“Contrary to investor perception, we don’t think the IT sector is overly weighted yet,” Sun said, adding that he expected the sector to generate a record 23 per cent profit growth year on year in 2016, the highest among all sectors.
The rationale for investing in China, Sun said, is to target industries whose growth will benefit from China’s slow, yet ongoing economic reform.