Navigating through the winds of change
(Part 2)
Are there more room for growth and opportunities in the Asian market space despite the recent market uncertainties? Find out from our fund partners in this second part of the market commentary.
Tap into the growth in Asian equities by PineBridge Investments
1) What opportunities are there in the Asian Equities market? What sectors should investors continue to allocate to?
The recent market selloff has brought down some valuations, opening up opportunities to accumulate or add high quality stocks. That said, we remain highly selective across our equity strategies. We look for companies that keep their eye on the future and have strong earnings prospects, but at the right valuation.
These could be companies operating in areas with long-term growth prospects like advanced manufacturing, advanced transportation, “branded” original equipment manufacturers (OEMs), or those that stand to gain from structural drivers like consumption and infrastructure spends. For example, OEMs (which make parts for products marketed by another company) that invest in proprietary research and development (R&D) today are more likely to gain market share and improve margins, and are less likely to be disrupted in the future. As bottom-up investors, we are not constrained by any sector allocation settings. With many changes afoot in Asia, we believe stock selection is key to unlocking compelling returns.
2) How will US Fed rate hikes affect Asian equity markets?
Historically, returns in Asia equity markets have appreciated alongside US rate hikes. Fundamentals should sufficiently support the financial markets amid this normalization. In general, the rate tightening cycle should be slower in Asia. The cycle has more room to run in Asia markets, where policymakers are further behind their developed world counterparts.
In the long-term, we believe that stock prices follow fundamentals over time. So as long as Asia continues to offer opportunities to investors, shorter-term volatility should not derail the Asia story. The short-term reaction to rate hikes could favour the US, but the trade will not take long to reverse as long as Asia’s growth potential still outpaces the majority of global markets.
3) Since markets have been pretty volatile lately, what investment strategy should investors adopt in 2018?
Markets today are much more driven by fundamentals rather than central bank policies, and the principal driver is earnings. In this environment, an investment strategy that replicates the benchmark, which represents yesterday’s winners, is not geared to provide the best returns. At the same time, the dispersion of valuations is high, meaning there are many expensive as well as cheap companies in the market, we believe that volatility presents an opportunity for skilled portfolio managers to uncover attractive mispriced stocks, which may present an opportunity to invest. Short-term volatility aside, Asian equities presents growth opportunities for the long-term and investors should look beyond temporary blips. Moreover, investors should draw out their risk profile and asset allocation, identify good managers with track-record across market cycles.
Opportunities within Asian Fixed Income by Allianz Global Investors
1. What opportunities are there in Asian High Yield?
Asian High Yield Bonds offers relatively attractive income, low correlation to US Treasuries and a relatively shorter duration. The asset class has exposure to fast growing Asian companies with relatively low default rates considering the current macro backdrop.
2. What sectors should investors continue to allocate to?
The global economy is doing reasonably well – but growth is becoming patchier. Regional differences are likely to become more pronounced. At the same time, many assets appear richly valued. Consequently, investors will need to be increasingly selective in 2018. Their expectations of active managers will increase as they seek more dynamic ways of sharing performance and fiduciary implications with their managers.
From an equity perspective, we favour Europe over the US, where the combination of reduced monetary stimulus and potentially overheated markets could turn into a major headwind if economic data lose momentum.
We think yield-seeking bond investors may find some relatively attractive opportunities in sovereign debt in Asia and emerging markets.
3. How will US Fed rate hikes affect yields?
4. Since markets have been pretty volatile lately, what investment strategy has the fund adopted in 2018?
With the rise in market volatility over recent months, the case for an active, less benchmark-aware investment management approach becomes even stronger. Over the first quarter, we have actively reduced the risk profile of the Fund to a more defensive positioning, and focused on interest accrual. This has resulted in a better relative performance compared to the benchmark. Looking ahead, markets are clearly focused on trade war developments and we are watching this closely to assess the potential impact to Asian credits. A negative macro backdrop resulting from trade wars may create broad-based risk aversion and in such situations, we may implement macro hedging strategies to help cushion the impact.
With these insights and strategies from PineBridge and Allianz Global Investors, consider taking the next step to find out which funds from can work for your portfolio. Simply search for the funds you want on dollarDEX using our Fund Finder to get started!
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Information is correct as of 01/06/2018.