Rate cuts, trade spats place instos on back foot

A string of rate cuts by countries trying to catch up with the US Federal Reserve is narrowing investment options.
Rate cuts, trade spats place instos on back foot

Asset owners should take a more conservative approach to portfolios, working to take risk off the table as the fallout of the US-China trade spat ripple across the world, argue some investment specialists.

Last week China let the tightly-controlled renminbi weaken beyond the psycologically important 7-level mark versus the US dollar for the first time in more than a decade just after President Donald Trump threatened tariffs on an additional $300 billion worth of Chinese goods. The US Department of Treasury subsequently labelled it a currency manipulator. On Thursday, China’s central bank set its official trading midpoint for the RMB-dollar pair at its weakest level since April 21, 2008.

With no signs of a thaw in relations and a worsening outlook for global trade, central banks in India, New Zealand, Thailand and the Philippines cut rates unexpectedly last week with Australia holding onto to its record-low interest rate.  

The moves are also prompted by a desire by these export-dependant economies to counter the competitive edge China is giving itself from a weaker yuan.  

But this means global investors seeking higher yields from fast-growing emerging market economies may have to swallow a bitter pill, at least in the near future.

Though yields are falling, the dearth of alternatives is keeping interest in sovereign bonds alive. With bond prices higher due to increased demand, total returns on the whole are still decent enough to attract interest, investment advisers say. 

Five-year German bunds, for example, yielded close to -0.4% at the start of 2019 but year-to-date total returns are still above 2%, said JP Morgan Asset Management portfolio manager Julio Callegari. Government bonds in Australia, Korea and Thailand also show very large returns on a yield-to-date basis, he said.  

Julio Callegari

“Investors probably will not give up the safety provided by some low- or negative-yielding bonds, since the potential for gains still exists,” said Callegari. 

That, as stocks, particularly in the US, are seen by some as overvalued. 


“It’s not a bad idea to lock in gains rather than be greedy and hope for the best,” following the 10-year bull run in US stocks, said Robert Jones, a Hong Kong-based director at FCL Advisory, which advises family offices on investments. 

“We’re living in strange times,” he said. “It’s a scary investment environment indeed,” he added.

Jones is advising clients to hedge rising portfolio risks by raising more cash and shorting equity markets either directly or through funds and by increasing exposure to physical gold and other real assets.

Robert Jones

Outside of the “occasional punt” on stressed and distressed issuers and sovereign debt, clients are staying away from bonds due to the poor risk-reward they offer, said Jones. 

One way to benefit from the relative safety of sovereign debt would be to continue holding such longer-duration bonds for their yield, said Callegari. 

Some institutional investors will prefer to wait and watch than overhaul their portfolios immediately. 

“We won't change our strategy based on short-term fluctuations in the market,” said an executive at a Hong Kong-based asset owner. “The impact [of the recent rate cuts] is rather limited because our asset allocation is contracted out to external fund managers.”

Leon Goldfeld


In any case, Leon Goldfeld, a a multi-asset portfolio manager at JP Morgan Asset Management, said conversations with prospective and current clients did not show cause for alarm yet.

“We don't think this is a one-way road to recession. The general sentiment is that of caution rather than fear,” he added. "People are more circumspect." 

A useful strategy would be to reduce equity and credit market exposure and put money into relatively safer assets such as US and Australian government bonds despite their lower yields, Goldfeld said. 

But markets' bet that a recession in the US is around the corner rose to their highest level since 2007. 

On Wednesday, the yield on 10-year benchmark US treasuries hit a three-year low, with the inversion with three-month treasuries rising by the most in more than 12 years.

But fears of a recession may be vastly exaggerated, contended Goldfeld. 

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