Market volatility continues in 2022, with persistently high inflation at the forefront of investor concerns globally. Investors are now paying more attention to the more aggressive tightening by central banks around the world, which could lead to potential risks of a recession next year.
However, Asia assets, including equities and fixed income, are in a better position than their western counterparts, as the Consumer Price Index (CPI) in the region is still under control, according to Kelly Chung, senior fund manager for multi-asset at Value Partners.
“Inflation pressure due to rising commodity prices has started to affect some Asian countries. However, as their inflation was at a much lower level relative to the west, most central banks in Asia being more patient in rate hikes than the US and Europe,” Chung said.
Inflation was already high in other parts of the world towards the end of 2021
Source: Morgan Stanley Research, Haver Analytics, January 2022
China, for example, has become the only country that will be easing on both monetary and fiscal fronts, as the government’s priority this year is to stimulate weakening demand. As a result, Chinese government bonds are the only government bonds that rallied on a year-to-date basis due to the easing expectations, she said.
Chung added that Chinese property bonds, which were heavily battered last year due to regulatory and liquidity concerns, have already bottomed on the back of supportive measures in the property sector. “More measures are expected to be released, which has lifted the sentiment of the overall Chinese high yield bond space,” she said, noting that valuations of the overall Asian high yield bond universe are still attractive.
Meanwhile, other parts of Asia benefit from higher commodity prices, such as Indonesia, being a net exporter of commodities. Indonesian equities have led the ASEAN market, returning nearly 10% during the first quarter1.
Chung noted, however, that she remains cautious on some markets in Asia, including South Korea. Following four rate hikes since August last year – the latest in April 2022 – the pace of tightening by the Bank of Korea remains uncertain, with the market expecting further rate hikes this year, she added.
Achieving lower volatility through a dynamic multi-asset strategy
Chung manages the Value Partners Asset Allocation Asian bias strategy, which is an actively managed multi-asset portfolio. It invests across Asian assets, including equities and fixed income.
The strategy aims to achieve lower volatility through diversification, not only among different asset classes but also among sectors, countries, styles and risk factors. “Under the current volatile market environment and tightening conditions, risk management through proper diversification is key,” Chung explained.
She noted that having a dynamic strategy is key to risk management, in which the portfolio can flexibly invest across different asset classes to maximise risk-adjusted returns. The strategy combines top-down macro views and bottom-up fundamental research. Hedging strategies can also be employed to manage risks when needed.
During the first quarter, Chung made some changes in the portfolio in light of several uncertainties the market faces. For example, the average portfolio credit rating rose to BB from BB- by reducing the percentage of non-rated bonds and shifting into investment grade bonds. She has also reduced its exposure to technology stocks due to the rising interest rate environment, especially with longer cash flow duration, as they are more vulnerable as yields get higher.
At the country level, Chung slightly reduced the portfolio’s Taiwan exposure on expectations that the semiconductor cycle has peaked, although she noted that fundamentals remain solid.
In terms of capturing opportunities, Chung increased the portfolio’s Indonesian stock and bond holdings during the quarter on the back of the country’s reopening and higher commodity prices. Similarly, the exposure to energy and commodities has also increased due to higher energy prices and inflation. Chung also added to the China infrastructure play due to fiscal easing expectations.
Indeed, the strategy has delivered better risk-adjusted returns than the broader market. For the three-year period ending March 2022, while the strategy was able to achieve lower volatility than the MSCI AC Asia ex Japan Index, it was also able to generate more returns on an annualised basis.
Source: Value Partners, MSCI, as of 31 March 2022
Chung leverages on Value Partners’ around 70 on-the-ground equities and fixed income investment professionals, each covering a specific area in the market. Chung is an award-winning fund manager with more than 20 years of experience in multi-asset portfolio management. She joined Value Partners in 2016 and helped establish the firm’s asset allocation platform. Since she joined, Chung was able to build Value Partners’ multi-asset franchise with an outperformance track record against peers. As of the end of 2021, the strategy ranks in the first quartile among its peers in the one-year, three-year and since inception periods2.
1 - MSCI, 31 March 2022
2 - Morningstar, as at 31 December 2021. Peer group refers to the Morningstar Category of Asia Allocation