Wealthy investors in Asia have retained bond-heavy allocations even as global stock markets have boomed this year, private bankers have told AsianInvestor. This is despite many asset and wealth managers advising clients to shift capital to equities.
“We’ve seen some outflows from bonds into equities, but they have not been huge, and the majority of investors are still in fixed income,” Tuan Huynh, chief investment officer and head of wealth discretionary for Asia Pacific at Deutsche Wealth Management, told AsianInvestor.
Wealthy Asia-based investors tend have at least 50% of their portfolios invested in bonds, according to industry experts.
Stocks – particularly in emerging markets – have had a stellar run this year. The MSCI Emerging Markets index gained 25% and the MSCI AC Asia ex-Japan index 29% this year as of July 31.
Hence a shift towards such assets seems even less likely now, Huynh said: clients see how well equities have performed and are reluctant to move in at this stage. Certainly, investors seem to be turning more cautious on Asian and US equities, for instance.
However, given the broadly improving global economic outlook, some asset and wealth managers believe their clients should have more equity exposure, while keeping a close eye on the US rate hike cycle and simmering tension between the US and North Korea.
Rocky Cheung, head of investment product and advisory for wealth management at DBS in Hong Kong, said the bank was encouraging clients who had more than 50% bond exposure in their portfolios and a medium risk appetite to shift a portion of their holdings into equities.
Backing EM prospects
The pro-equity stance is underpinned by rising confidence in global economic prospects.
“We are witnessing the most synchronised global economic recovery since 2010,” said Shoqat Bunglawala, head of the global portfolio solutions group for Europe, the Middle East, Africa and Asia Pacific ex-Japan at Goldman Sachs Asset Management.
According to a World Bank report released in June, global growth is forecast to strengthen to 2.7% in 2017 and 2.9% in 2018-19. It forecast that emerging markets would average 4.1% GDP growth in 2017 and 4.6% in 2018-19, as obstacles to growth in commodity exporters diminish, while activity in commodity importers remains robust, the bank said.
From a medium-term perspective, Bunglawala expects to see emerging markets outperform developed markets.
Moreover, EM bonds are also finding favour with some experts, though caution is advised.
“With interest rates remaining high in emerging markets compared with developed markets, we expect returns to outperform other major fixed income asset classes over the next 12 months,” said Deutsche’s Huynh.
In a house view report published yesterday, Andrew Milligan, head of global strategy at Aberdeen Standard Investments, said the only fixed income market he favoured was EM debt, where “spreads look to provide adequate compensation for investment risk, even if growth in China is constrained”.
Manpreet Gill, head of fixed income, currencies and commodities investment strategy at Standard Chartered Bank, was positive on both local- and hard-currency EM sovereign bonds.
Investors are receiving just over 5% yield from a typical developed market high-yield bond, he said, but can get about 5% on EM dollar government bonds, which are roughly a 50:50 mix of investment grade and high yield.
Higher quality advised
However, he argued that it was time for investors to not simply chase yield but also focus on quality. “So even within high yield, we would favour relatively higher-quality segments,” he added. This is because the market is in the late stage of a credit expansion cycle and higher-quality assets have tended to do well in such periods.
James Cheo, investment strategist at Bank of Singapore, also expressed caution on EM debt, following the sustained rally. “We have been overweight on EM bonds for the past few years, but have started to become more nuanced in how we view this segment.”
“EM bonds are still attractive because of their carry, but we are advising investors to go up in quality,” he noted. “So if an investor is switching, we would suggest he/she go from triple B to A grade, for instance.”
What about the implications of rising US interest rates for EM debt? In general, experts said it would not result in another 'taper tantrum', such as the one in 2013, because emerging markets have current-account deficits under control and the US Federal Reserve has been open about flagging rate hikes.