Our preference for high quality bonds has helped in the first half of the year and should continue to supplant government bonds in protecting portfolios against risks in the global economy.
Our advice of some six months ago, namely the need for added emphasis on risk management, coupled with a broader, more creative approach to portfolio management, remains as prudent as ever. This approach is reflected in the enhanced role corporate credit increasingly plays within portfolios.
The continued crisis in the eurozone and the upcoming US Presidential elections as well as the impending so-called US fiscal cliff will continue to impact markets in Asia for the rest of the year.
Economies in Asia (ex-Japan) are expected to track near 7% GDP growth in 2012, down from 7.5% in 2011, with the slowdown seen in the first half of the year giving way to a modest acceleration in the latter half of 2012.
Monetary policy has remained relatively restrictive, as real interest rates have risen in Asia so far this year which, combined with the instability in Europe, has been a key headwind for economic growth. With inflation now falling in most Asian nations, there will be less of a case for continued monetary policy tightness.
Indeed, with the modest performance of Asian equities and the relatively strong performance of Asian corporate bonds, dividend strategies within Asia should begin to further re-assert their position as a stable, low volatility return opportunity for conservatively-minded investors in the region.
Other investment themes:
- Asian equities represent an attractive opportunity in absolute terms and relative to global counterparts for investors with long-term horizons;
- They are trading at a discount to global peers comparable to that seen during the 2008-2009 global financial crisis;
- They have priced in an outright crisis similar to the 2001 dotcom bust, the 2003 SARS crisis and the 2008-2009 crisis.
- Western economic uncertainties are supportive to Asian credit given the higher growth and stronger fundamentals in the region’s financial sector;
- Local currency bonds to remain in favour as yields remain relatively high, as inflation has likely peaked and monetary authorities are unlikely to increase rates. Also, Asian governments are eager to diversify foreign exchange reserves away from G3 currencies;
- We remain cautious on USD denominated credits given the credit cycle may have peaked and default rates for high yield bonds may rise in the medium term.
- Managing risks, particularly amidst global volatility remain a key component to constructing Asian asset portfolios for the balance of the year;
- We recommend gold as a long term store of value against the prospect of depreciating major currencies.