Taiwan institutions still eyeing US bonds, stocks
Asset owners in Taiwan will continue to invest more overseas this year, particularly in US stocks and bonds when their prices drop, say local fund managers. This is despite the fact that the S&P 500 hit a record high on Friday and US interest rates are expected to rise this year.
Taiwanese institutions are likely to allocate more to US debt after the first quarter, when policy under the new Donald Trump administration is expected to be clearer and the renminbi may have stabilised, said Ian Chang, deputy general manager of the bond division at Taipei-based Capital Investment Trust Corporation (CITC).
Institutions are also likely to increase positions in US investment-grade bonds in the second quarter, when prices could fall following a Federal Reserve rate hike that is expected in the first quarter, he told AsianInvestor.
Stocks are likely to perform better than bonds this year, Chang added, but even local institutions that are optimistic about equities are only likely to add three to five percentage points to a typical 10% allocation. Their largest exposure will continue to be to fixed income, he said.
US high-yield bonds have been performing better than US IG debt since the US rate hike on December 16, noted Chang, but Taiwanese institutions such as insurance firms do not normally allocate much to high-yield bonds.
He added that Taiwanese institutional investors had taken profits on global high-yield bonds from September and on domestic and foreign stocks in November and December, but they had not started re-allocating that money yet.
Vincent Bourdarie, Taiwan chief investment officer of Nomura Asset Management, agreed he had seen institutional interest in US stocks, as well as in Japanese equities. However, US stocks are expensive, at around 17 times price-to-earnings, so investors are looking for cyclical opportunities, he noted, particularly in areas such as financials, small caps and technology stocks.
On the fixed income side, dollar-denominated emerging-market debt would be very interesting this year, Bourdarie told AsianInvestor. There are not yet any systemic risks in emerging markets, he said, so EM bonds still offer a good opportunity to generate more yield.
Indeed, Shin Kong Life, a domestic insurer with $66 billion in AUM, said in November it would raise EM debt exposure.
Like Chang, Aidan Wang, senior vice president of the investment and research division at Cathay Securities Investment Trust, recommended equities over bonds. He argued that energy, raw materials, financials and technology were sectors that would perform well during a period of rising global inflation, which is widely expected.
US equities do look expensive, admitted Wang, but US earnings are expected to improve, so their P/E ratios might actually fall.
Biggest hopes and fears
Wang said Taiwanese institutional investors’ biggest fear was that the US Fed will raise interest rates too much too quickly. Such a move would sharply raise lending and financing costs for US corporates and households, and would also affect global equity and bond markets.
The best scenario for global equities, he added, would be for countries around the globe to make tax cuts, as is expected, which would largely benefit global equities.
Chang argued that the worst-case scenario for 2017 would be for the US economy to peak – according to indicators such as the unemployment rate. CITC expects it to peak in 2018. If it were to peak before that – say, in the fourth quarter of 2017 – that would bring huge uncertainty to the world economy, and safe havens such as US Treasuries would benefit, noted Chang.
“So our investment suggestion is diversification,” he added, “to cope with any scenario that might happen in 2017.”
Taiwan’s Bureau of Labor Funds (BLF), the NT$3.55 trillion ($106 billion) state pension manager, might well agree with this conclusion. The overseas investment team told AsianInvestor it was concerned about multiple international risks. These include US trade policies and the tempo of Fed rate hikes, the UK’s negotiations for its exit from the EU and the upcoming general election in Germany.
BLF is also monitoring the process of China’s economic restructuring and whether oil-producing nations will abide by the late-November international agreement to cut output.
As a result of such concerns, BLF said it would adopt a dynamic approach to its investment strategy, according to market conditions. It will also strengthen its global multi-asset investment strategy with two new overseas mandates, one for ESG equity and one for absolute-return fixed income. The fund will also look to refine its approach to smart-beta index investing.