Positive developments in China, including a greater than expected fiscal stimulus after the National People’s Congress in March, a possible easing of US-China trade tensions, a cautious US Federal Reserve, improving financial conditions and strong global consumer demand, should bode well for developed markets, and support emerging market (EM) growth and asset valuations.
Ironically, this more stable picture of the global economy is being greeted with greater uncertainty and amplitudes in markets.
A lingering post-crisis global savings glut mixed with outsize central bank balance sheets is resulting in too much capital chasing too little cash flow. The tsunami of capital movements unleashed following each bit of information appears to be creating waves of short-term volatility that is far out of proportion to the significance of these triggers.
Given this environment, how can investors position their portfolios?
PineBridge Investments’ global multi-asset portfolio manager, Sunny Ng, CFA, believes investors need to take a dynamic approach to asset allocation in order to be flexible enough to be able to adjust their portfolios as market changes unfold, thereby mitigating risk while continuing to capture growth opportunities.
At PineBridge Investments (PineBridge), multi-asset allocation decisions are informed by the Capital Market Line (CML), which represents a five-year forward-looking view of risk and return across the asset class spectrum. PineBridge believes asset classes that lie near the line are close to fair value. Asset classes that are well above the line are deemed attractive (over an intermediate-term perspective) and those well below the line are deemed unattractive.
Capital Market Line as of 31 March 2019 (US dollar view, unhedged)
Source: PineBridge Investments. As of 31 March 2019. *Productivity Basket is constituted from a blended allocation to stocks of companies that provide productivity-enhancing technologies towards growing capital expenditure intentions globally. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Past performance is not indicative of future results. There is no assurance that any investment objective will be achieved. Represents the local currency view of the PineBridge Capital Market Line (CML). The CML is not intended to represent the return prospects of any PineBridge products, only the attractiveness of asset class indexes, compared across the capital markets. There can be no assurance that the expected returns will be achieved over any particular time horizon. This information may constitute “projections,” “forecasts” or other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a simulated set of assumptions to certain historical financial information. Note that the CML's shape and positioning were determined based on the larger categories and do not reflect the subset categories of select asset classes, which are shown to relative to other asset classes only.
Today, we believe equities remain the most attractive asset class and are contributing to a relatively steep CML. We find select exposures in EM equities attractive, particularly China A-shares, India, Korea, and Brazil, where we see signs of positive shifts. In fixed income, we maintain our low duration stance and favour investment grade collateralised loan obligations (CLO) debt, with a tilt toward AAA tranches. In alternatives, we continue to expect copper to benefit from a recovery in China’s infrastructure spending. In contrast, most fixed income and private assets remain uninspiring.
China’s policymakers have made a U-turn and once again are in an accommodating mode to offset the headwinds of over-ambitious deleveraging and US tariffs. To stimulate consumption, policymakers put in place tax breaks and import tariff cuts. These join an earlier infrastructure reboot. We see more policy actions to come until acceptable growth is restored in these areas.
Our specialist colleagues continue to report a very promising mobilisation of private sector capital as a result of India’s new bankruptcy framework, and credit growth is starting to re-emerge. This in turn has spurred private sector investment. Foreign direct investment is also accelerating, and after many years of stagnation, the government’s infrastructure programs are finally gaining traction. The reform of real estate markets now enables buyers to engage with higher levels of confidence in their rights versus those of developers.
South Korea is one market that would likely benefit from growth in China and other EM markets. Also encouraging are nascent developments that support shareholder returns.
With Luiz Inácio Lula da Silva no longer eligible to run for president, we now favour equities, having developed some conviction in the potential for fundamentals to continue their rapid improvement in the intermediate term.
CLOs generate income with very low realised default rates and without taking on too much duration, making it a suitable investment in the reflationary regime ahead. Subordination for investment grade tranches provides attractive levels of protection given the carry-on offer, based on our relatively benign default and recovery rate expectations for bank loans.
We are seeing strong bids for copper in the London Metal Exchange Asian warehouses, with strong demand in China. Further stimulus in China would be focused on fixed asset investment, which is generally highly copper-intensive, particularly within the high-priority power sector.
Lingering market uncertainty challenges investors to be more agile and selective. We believe a dynamic approach offers investors the ability to have the right blend of assets at the right time. By moving between markets and between asset classes and selecting attractive insights, dynamic multi-asset portfolios are better equipped to anticipate market shifts and deliver the alpha investors need to meet their goals.
To learn more about multi-asset investing, visit the PineBridge Multi-Asset Insights website.
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Last updated 4 March 2019