Equities to outperform bonds as volatility set to rise, say Pictet and State Street
Pictet recommends Hong Kong investors take cues from market corrections to place bets into equities. State Street favours US-listed China tech stocks even though they are still volatile
Global investors have been enjoying strong returns in both the equity and fixed income markets this year amid benign inflation, low market volatility and a mild recovery in global economic growth.
But risk-rewards have worsened, implying that market volatility is expected to rise from current low levels, even if equities are set to outperform bonds next year, two leading fund management experts have told South China Morning Post.
Pictet Asset Management, a leading European wealth manager with US$193 billion of assets under management, said it is now recommending Hong Kong investors take cues from market corrections to place bets into equities next year, while expecting Asian credit and bond funds to be unlikely to offer significant upside.
While US finance giant State Street, which manages US$2.67 trillion in assets, suggests diversifying and overweighting stocks in a portfolio to withstand correction. It is also underweight in fixed income in their global portfolio.
The Hang Seng Index has been sliding from a 10-year high last week, tracking declines in China’s mainland markets on fears that liquidity conditions might tighten sharply after a series of recent policy measures taken by Beijing to manage excessive risk in the financial markets.
“Hong Kong retail investors were taking profit too soon and might have missed a continued equity Bull Run,” said Lawrence Tse, senior vice-president of Pictet Asset Management, adding that investors should buy funds that pick stocks, over those that tout a market-picking strategy given the possibility of further market volatility.
Tse says his advice for more allocation into equity retail funds has come amid a persistently higher level of retail interests into bond funds – a trend that has started since the beginning of 2016 and continued up to the third quarter this year.
For the third quarter, 45.3 per cent of retail fund gross sales in Hong Kong went into bond funds, dwarfing 25 per cent gross sales into equity funds, he added.
Net sales of retail funds totalled US$8.88 billion for the year ended September. Of this, bond funds net sales amounted to US$10.1 billion; whereas equities funds experienced net outflow of US$5.96 billion.
He said as companies globally continue to digitalise their operations, he sees attractive investment opportunities in companies that specialise in data and cybersecurity.
Elsewhere, in the traditional economy, he also expects the energy, commodity and financial services sectors to perform better in 2018
Whether China can succeed in its ambitious task of engineering a controlled, decline in credit growth and economic growth, by changing the composition toward services from fixed investments and industrial activity is still yet to be seen.
Rick Lacaille, global chief investment officer at State Street Global Advisors favours US-listed China tech stocks because of the strong growth potential for those companies remain even though they are in a volatile area.
“The point we make to investors globally is that 2018 could be the breakout year for China. We’ve seen consumption rising quite rapidly, which is part of the rotation of the economy offering investment opportunities.”
Pictet’s Tse cautions, however, against buying Asian credit due to expectations that new bond issuers will continue to come to the market with tight spreads, squeezing room for the bonds to trade any tighter during the bonds’ tenor.