Credit, equities tipped as Covid-19 recovery plays

Asian investors found fixed income appealing in the second quarter, but selective equity allocation might be a better bet for the rest of the year, say active investing experts.
Credit, equities tipped as Covid-19 recovery plays

The impact of the Covid-19 pandemic continues to be felt among Asia’s investors. It led retail-focused asset managers to shift into fixed income funds during the first quarter, and Asian corporate bonds may well continue to appeal, according to research firm Cerulli Associates and fund house Schroders.

However, as 2021 approaches it’s possible that equity markets will enjoy selective recovery as the economic outlook brightens, says a new report from $1 trillion institutional investor-focused fund house Nuveen.

In its own new study, launched on Tuesday (July 14), Cerulli found that many Asian financial markets shrank by 10% during the first quarter amid surging coronavirus cases and a sharp drop in oil prices. China and Korea were exceptions; those markets grew by 12.1% and 1.4%, respectively.

Stock markets accounted for much of the shrinkage. Cerulli noted that “as most global market indices declined by more than 20% in the first quarter, equity funds’ market share shrank from 23.7% in 2019 to 20% in March 2020”. In contrast, the market share of bond and money market funds rose by 1% percentage point and 3.7 percentage points, respectively, “as investors sought safety in such funds”.

Ricky Tang, Schroders

While the survey was mainly focused on retail-focused fund managers, the need for definitive returns has been on the minds of asset owners across Asia.

A new report by Schroders also pointed to the appeal of Asia fixed income.

Ricky Tang, deputy head of multi-asset products for North Asia at the UK fund house, sees corporate debt as an attractive choice for investors seeking both protection and upside potential. "This is especially true for investment grade credit in the Asia market," he said.

While US credit spreads stood at about 1.8%, the average investment grade corporate bond in Asia offered a more appealing 3% to 4%, Schroders said.

And while plans by the US Federal Reserve to buy US corporate bonds will not directly affect Asia, such moves may still cause US credit spreads to narrow and encourage investors to seek opportunities in the Asian credit, noted Tang.


While equity funds struggled in the first quarter, they enjoyed a major rebound during the second, as investors decided to return to stocks they felt had been judged overly harshly amid unprecedented monetary and fiscal efforts to prevent a global depression.

The fact that a pandemic was to blame – as opposed to structural economic weakness – was also a likely contributor, according to Robert Doll, senior equity strategist at Nuveen. 

Robert Doll, Nuveen

Indeed, Cerulli said asset managers in Hong Kong, Singapore, Taiwan, India and Korea had named equity strategies as "the top broad strategies that they would like to promote to distributors this year".

That said, further stock market volatility looks likely, particularly as corporates begin to report what are highly likely to be disastrous financial results for the first half of the year.

The potential impact of Covid-19 on corporate earnings is “a wild card, adding uncertainties to equity valuation forecasts”, said Schroders' Tang.

Nuveen’s Doll appeared to concur. While the global economy had quickly rebounded from a second-quarter recession, he said, economic growth was likely to be uneven and slow, meaning there would likely be no real earnings momentum until late 2020 or early 2021.

“This is not going to be an easy investing environment,” Doll added.  

However, as has become increasingly apparent, 2020 finally looks like a year in which quality active fund managers can shine, as they have begun to do of late.

“Investors should focus on selectivity, be nimble and flexible and rely on diligent research to uncover opportunities,” said Doll. Cyclical stocks are likely to look more attractive than defensive areas, he added, especially if they haven’t yet “fully priced in the effects of the current and pending global economic recovery”.

He pointed to technology and health care in particular, but noted that the financial sector was also relatively cheap and had reasonable quality.

Meanwhile, in addition to favouring technology as a sector, Schroders Tang said infrastructure could benefit from fiscal stimulus. He also sees potential for bargains in struggling sectors like tourism, retail and energy, but urges caution in respect of potential defaults and bankruptcy risks.

Selectivity appears to be the name of the equity game for this year.

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