At the beginning of every China New Year, AsianInvestor makes 10 predictions about economic, political and financial developments that are likely to have an impact on the way institutional investors assign their money.

This last question focuses on which mainstream and alternative asset class will offer the best risk-adjusted returns.

Which asset class will offer the best risk-adjusted returns?

Answer: Emerging market equities (mainstream), private credit (alternative)

Emerging market shares took a disproportionately big hit last year as global stock markets, generally, came under pressure – while the MSCI World Index fell 8.71%, the MSCI Emerging Markets Index lost 14.57%.

Turkey and Argentina were notable weak spots as rising US interest rates and dollar strength combined with questionable domestic policies to draw capital out of these markets. The Global X MSCI Argentina index, for example, weakened by 33.7% over the course of 2018, contrasting with the positive 54.4% it delivered in 2017.

Signs of a slowdown in global economic growth also shook up emerging markets. China’s major index, the Shanghai Composite, ended 2018 down 24.6%.

The world's second-biggest economy has since continued to show weakness, with data published this year showing 6.4% year-on-year growth for the fourth quarter past – the slowest rate of growth since the global financial crisis.

Coupled with the ongoing US-China trade spat, there are multiple reasons to be gloomy about the outlook both about Chinese and, more broadly, emerging market shares.

But, as the saying goes, with crisis comes opportunity.

EMERGING MARKET EQUITIES

We believe emerging market stocks present the best risk-adjusted investment opportunity over the coming year.

One thing in their favour is that they are cheaper. Although developed market equities also suffered last year, with the S&P 500 losing 6.2% in 2018, some valuations, not least high-growth tech companies, are still considered overpriced on Wall Street, one UK-based investment consultant told AsianInvestor

At its peak last year the S&P 500 was trading at 19.5 times forward earnings. By Wednesday's close, it was at 16.25 times, based on WSJ markets data.

Whether that's enough of a concession to investors remains to be seen. But it stands in contrast to emerging markets, where the corresponding ratio was below 12 times, according to a Yardeni Research briefing published this week.  

That said, there are still troubling political and economic undercurrents in some places that could yet hurt the emerging markets asset class, not least in Venezuela.

So it remains as important as ever to construct a diversified portfolio with multiple assets in different geographies to successfully navigate the darkest trenches of the market.

PRIVATE DEBT

 

When it comes to alternative investments, private credit is our pick for the coming year. 

The asset class is certainly attracting interest from asset owners.

For example, The Swiss-based insurer, Zurich’s Hong Kong and Singapore arms, expected to dip their toes in direct lending while Taiping Investment Holdings, which is tasked with overseeing up to 25% of China Taiping Insurance’s alternative asset portfolio, is eyeing more private senior secured loans.

As one US-based asset manager told AsianInvestor, senior loans, opportunistic and distress debt are some of the specific strategies to look out for this year.

Private debt may be gaining more institutional investor interest, and there is the risk that rising rates cause more defaults and impact the yields available. But the asset class also offers a fairly predictable level of return, and in types of investments that aren't directly correlated with capital market assets.

For many investors, that's appealing enough. 

Previous Year of the Pig predictions:

Will the US-China trade war intensify?

Will China ease its inbound investment rules?

Will bonds beat stocks?

Can Brexit shock global markets?

Will asset owners take ESG seriously?

Have asset owners set realistic investment returns targets for the year?

Will the ETF Connect finally open? 

How much will Asian asset owners increase alternative asset allocations?

Will the US economy suffer a major downturn?