Overall market volatility remains 'eerily low'
Investors advised to extend their reach and remain diversified, writes John Cremer
Nervous investors - and fund managers with monthly reports to write - can find any number of reasons to worry. The United States elections, an imploding euro, the third round of quantitative easing (QE3) and the predictable leadership transition in China have fuelled all kinds of speculation about where markets will move and why.
But in the end, the business of investing remains basically the same. The macro environment is what it is, politicians come and go, and individuals in search of solid returns must just make the best of the opportunities placed before them. In that, there is nothing new, and whatever the concerns, the range of funds available in Hong Kong still offer the choice and geographical spread to achieve consistent, respectable gains.
"Our advice to investors is to extend their reach and remain diversified across a spread of asset classes, without retreating into cash or short-term bonds," says Stephen Hull, BlackRock's head of client solutions for Asia ex-Japan. "Across the industry, we have seen flows into municipal bonds and, more locally, strong moves into Chinese equities, which many argue are undervalued."
Attributing this in part to US and mainland political outcomes, Hull notes that overall market volatility remains "eerily low" despite persistent economic frailties. Against that backdrop, certain investment themes will appeal.
One is a continuing focus on cash-rich companies with strong balance sheets able to pay out dividends. Another is a lean towards Asean markets where structural change in the investment cycle has made growth more sustainable than in the past. And a third is the opportunity in India created by market reforms and investment in infrastructure.
"We believe these reforms could continue to support recent momentum," Hull says. "We would also note that the Japanese market has been decoupled from broad equity markets in recent weeks and could continue to outperform if the country moves steadily to adopt aggressive pro-growth, weaker yen policies."
Andrew Swan, head of Asian fundamental equities for BlackRock, adds that, with the regional economy apparently bottoming out, Asian stocks can be seen as "cheap". Moving into next year, earnings upgrades can be expected from major companies, which should lead markets and related funds higher.
"Inflows into most Asian markets are also putting upward pressure on a number of regional currencies," Swan says. "[There will be] a spillover impact on asset prices."
According to Angel Wu, ABN Amro's regional head of product and solution for private banking in Asia, high-yield bond funds remain "hot". However, investor demand is now increasing for balanced funds and Asia ex-Japan equity funds, signalling a shift from the generally ultra cautious sentiment of the past 12 months.
"Confidence in equities has not fully recovered, but a better economic outlook is providing reasons for a more 'risk on' mentality," Wu says.
She points to the reduction of systemic risk, strong reflationary policies from central banks, and the resilience of corporate earnings as cause to rebalance fund holdings away from a dependence on bonds.
"We believe it is right timing to be overweight in equities," Wu says. "We like emerging Asia and China, prefer companies with sustainable growth and solid cash flows and, in particular, see potential in financials, infrastructure and properties."
For Medha Samant, investment director for equities at Fidelity Worldwide Investment, the key themes are yield funds, Asean markets offering a premium versus the rest of the world, and South Asia, especially India, ahead of north Asia.
Investors obviously want income, from dividends if not price appreciation, so exporters are out of favour, while funds focused on developing economies are once again to the fore. "The Indian market has size, scale and investability," Samant says. "Investor inflows are swinging upwards and valuations are still good compared to the historic trading range." Thailand funds remain "attractive" with GDP growth on the up side; Korean carmakers and electronics companies have domestic buyers to offset any export downturn; and China offers insurance companies and plays on consumption promising good prospects. Even with concerns about a slowdown, Gary Dugan, chief investment officer at Coutts for Asia and the Middle East, similarly sees potential for mainland-linked stocks.
"China is one place we want to buy - in the corporate debt market and equities," Dugan says. "We also see cyclical recovery in Asia, so regional markets are becoming more interesting."
While understanding the chase into high-yield bonds for perceived safety and steady earnings, he stresses the need for proper due diligence.
Too many investors simply look at the "label" and set expectations too high.
"Our central message is to have a balance between bonds and equities," Dugan says. "In this region, it is natural to have 30 to 40 per cent in equities, but most people are now at the low end of that range."