It is a discussion and topic that has
come up many times before, but the volatility we are witnessing across global
markets this year meant there is no better time to start considering or
adapting multi-asset strategies in Asia. And here are our reasons why.
There’s no stopping the U.S.-China trade war
If you have
been reading about financial news for the past six months, it is hard to not
come across a single story that does not talk about the ongoing U.S.-China
trade dispute. While there have obviously been other major developments across
the global markets, none has come close to matching the headlines, negativity
and volatility generated by the tug-of-war between the two largest economies in
the world.
To make matters
worse, the scope of the trade war is expanding, with the U.S. targeting US$78
billion worth of Chinese consumer goods in its latest round of tariffs. This is
the first major move the Trump administration has made on the sector, as only
US$3.7 billion of Chinese consumer goods were affected when an earlier set of
tariffs was announced in July.
We could
therefore soon witness the trade dispute having a more direct impact on China’s
economy, which will mount the pressure on a market that is already worried
about the country’s slowing growth to begin with.
On the other
hand, stateside consumers could also be feeling the pinch of the tariffs on
Chinese consumer goods as a result of higher retail prices. This would add to
the inflationary pressure the U.S. is facing, which could prompt the Fed to quicken
the pace of its rate hikes. In terms of investments, what this means is
increased volatility across two of today’s most mainstream asset classes -
equities and fixed income.
Risk
diversification
Just how much
bearing has this had on the markets? Here is a quick look at the year-to-date
performances of four of Asia ex-Japan’s main stock indices1 - Hong
Kong Hang Seng Index (-16.9%), Shanghai Stock Exchange Composite Index
(-21.5%), Shenzhen Stock Exchange Composite Index (-31.6%) and Straits Times Index
(-12.1%).
They do not
make for pretty reading and although valuations are looking rather attractive
following the recent corrections, it can be hard for investors to fully commit
to equities under the current environment.
Taking cover in
the bond market, however, is not exactly the safest option either. The Asian
high yield bond space, for example, has taken a heavy beating, with the JP
Morgan Asia Credit High Yield Index widening by 127 basis points since the
start of 2018. The broader JP Morgan Asia Credit Composite Index has also
widened by 53 basis points over the same period of time.
This is where a
multi-asset strategy can come into play because it allows exposure to a broader
range of assets and sectors. It is different from what is commonly known as a
balanced portfolio, which would typically consists of equity and fixed income
securities in a 60/40 split (either way). The investment universe of a
multi-asset strategy is far more diverse and can include equities, conventional
bonds, convertible bonds, currencies, commodity-related assets, private assets
and alternative investments.
While investing
in multiple assets does not guarantee a profit, it does provide better
flexibility and risk diversification as well as downside protection compared to
more asset-specific strategies or traditional 60/40 portfolio allocations.
In the
short-term, this provides investors with immediate “breathing space” against
existing volatility, allowing them time to analyze the situation before coming
up with the appropriate adjustments or investments.
It is also an
optimal strategy to help investors meet longer-term investment objectives by
striking the right balance between managing risks and grasping opportunities.
In other words, there really is a way for investors to have their cake and eat
it.
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