AsianInvestor's investment intelligence data platform, Asset Owner Insights, recently conducted a comprehensive survey on asset allocation strategies and future outlook among the leading institutions in the Asia-Pacific region.
Among the key takeaways from the 56 asset owners who were surveyed, geopolitical risks and persistently high inflation were cited equally (17%) as the biggest investment risks to their portfolios over the next six to 12 months.
The survey results suggest that central banks’ policies in response to the macro backdrop will continue to create uncertainties for equity and bond valuations for the rest of 2023 according to Kebelyn Lee, research manager at AsianInvestor.
“Escalating US-China tensions and the Russian-Ukraine conflict have disrupted cross border capital flows, dampened IPO activity, increased capital risk aversion, and restrained tech stock growth, resulting in lower equity valuations,” said Lee.
“Additionally, the surge in energy prices due to the Russian-Ukraine situation has triggered high inflation and interest rates, further impacting bond valuations.”
The potential for re-acceleration in inflation will be a key factor over the next six to 12 months, not least for its impact on global yields and risk appetite more generally, according to Dwyfor Evans, head of APAC macro strategy at State Street Global Markets.
“Early August high-frequency online price trends indicate a bounce in both energy and food prices, and while exogenous to policy making, will concern central banks if they add to inflation expectations,” Evans told AsianInvestor.
Higher real yields will result in tighter financial conditions, putting risk assets under pressure, he said.
“High frequency investor behaviour indicators also suggest that some of the recent optimism around risk strategies have proven short-lived, which can be ascribed to a more challenging macro environment, fears over Chinese economic weakness and also the vagaries around geo-politics,” said Evans.
Central bank policies will continue to create uncertainties for the market as most central banks are now finding it difficult to provide forward guidance and are data dependent, according to Kelly Chung, investment director and head of multi-assets at Value Partners.
As a result, the markets are becoming more reactive to each new piece of economic data and each new message from the central bank members.
“These central bank messages will create uncertainties on the bond yields and FX and therefore affect equity and fixed income valuations,” Chung told AsianInvestor.
Besides central bank policy, economic data and political risk will also add to uncertainty, she said.
“Therefore, we expect the market to remain volatile through 2023 and 2024 particularly as there may be a second wave of inflation hitting after it had been decelerating over the summer.”
While the high inflation that finally stirred policymakers into action is likely to moderate, the underlying drivers of higher prices – scarcity of important goods and commodities, tightness in labour markets and heightened geopolitical tension – will remain risks for investors for the rest of the decade, according to Sylvia Sheng, global multi-asset strategist at JP Morgan Asset Management.
“Addressing these issues is likely to require substantial investment, meaning we may be about to see a capex boom just as central banks are raising rates and capital is becoming scarcer,” Sheng told AsianInvestor.
This could all translate to a better environment for investors to derive returns both from market beta and from active alpha.
“For investors with capital to deploy, a wide range of assets offer appealing potential returns,” said Sheng.
“For those still cautious, bonds can once again provide both income and a safe haven. Meanwhile, those rotating existing portfolios are no longer confined to less liquid assets to boost returns, and balanced portfolios can compound returns at a much better pace.”
For more information on our in-house research insights and for a demonstration of our asset owner intelligence platform, please reach out to Kebelyn Lee at kebelyn.[email protected] and Tim Cresner at [email protected]