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Manulife InvestChoice – Q3 Market Outlook

August 2021

Quarterly Asset Allocation Views


With the reopening taking root in key developed economies, we find ourselves gravitating toward a cyclical expansion with reduced uncertainties. We expect global central banks to embark on a path toward normalization, (very) slowly unwind the extraordinary monetary policy measures introduced during the crisis—albeit at a different pace. This will likely begin with a tapering of current asset purchases in 2021/2022.

  • While the pace of the reopening will likely be uneven, in aggregate, we believe the global economy is on track to see broad improvements in general economic activity, from household spending to global trade.
  • We remain optimistic about the US growth outlook for the next several quarters and therefore remain constructive on US equities. However, our view is tempered by high valuations and the likelihood that excitement regarding the reopening trade could soon migrate to other regions as they catch up to the United States.
  • On a structural basis, the United States has the healthiest long-term economic profile in the developed world; however, stock valuations and an expected dollar depreciation (particularly against other key developed-market currencies) remain modest headwinds for the asset class.
  • Within EM, while the asset class is increasingly weighted toward technology, it remains levered to manufacturing and the global trade impulse, which we expect to remain strong over the next few quarters. Recent concerns about the cooling Chinese macro backdrop have affected Chinese equities and caused the broad asset class to lag, but improved market sentiment following an overly negative market reaction could lead to a period of outperformance in China.

Fixed Income2

Global bonds can offer some protection from market volatility, although low and negative rates globally provide little yield or opportunities for appreciation. We believe the Fed will keep front-end rates pinned by pushing out rate hike expectations even as it tapers asset purchases.

  • Despite our belief that interest rates will gradually rise, they’re likely to stay near historic lows and struggle to exceed pre-pandemic levels, even over the course of the next few years. With muted returns expected in the fixed-income space, particularly in global government debt, asset classes that can provide additional yield are likely to find favour with investors; this is especially true for asset classes that can also provide diversification benefits. This perspective underpins some of our higher-conviction views, such as our overweight stance on emerging-market (EM) debt.
  • Our overweight stance on EM debt continues to be one of our strongest-conviction views—in both the short term and the long term. From a tactical perspective, strengthening momentum behind the global economic rebound and a stall in USD strength should provide support to the asset class. Finally, we have a slight preference for local currency debt over USD-denominated EM debt, a view that’s consistent with our expectation for the greenback to weaken over the long term.
  • We have a favorable view of high-yield debt, thanks to its exposure to cyclical risk and the carry the asset class provides in the current low interest-rate environment. In our view, the income return that the asset class offers more than offsets the risks associated with price movements. In our view, the appeal of investment-grade credit is similar to high-yield debt, which includes the ability to provide positive carry that’s likely to outweigh headwinds arising from higher interest rates and a generally favorable outlook on the back of improved growth.


Low short-term rates make this an unattractive asset class.

Quarterly Fund Managers’ Views

Below market views are provided by the respective fund house.


After a sharp recovery from the pandemic-driven collapse in economic activity in 1H21, we expect growth globally and, in the Asia Pacific region to moderate in 2H21 and into 2022. The Fed delivered a hawkish stance in the June FOMC meeting. The Fed would try to begin the long process of tightening and tapering is likely to be one of the most closely watched events in the second half.  In our view, most market participants have not been ready for tighter monetary policy.  The market may be pricing in excessive optimism on these companies, with growth fueled by external capital, which may be challenged into a sell-off and as yields rise. With the risk premiums needing to discount higher real rates and slowing monetary policy support we remain valuation sensitive and will strictly adhere to paying a reasonable price for sustainable growth. We prefer companies with high quality management, have the ability to generate internal cash flow to fund their long-term growth plans and that can deliver on expectations.

China: The structural growth trend of sectors receiving strong support from the government remains intact. The deployment of 5G technology is expected to drive growth in the build out of new infrastructure, e.g. ultra-high voltage power supply, smart cities and vehicle-to-everything support systems. In the consumption space, consumers in China have shifted their preference for national brands.

On the other side of China, heightened scrutiny, introduction of new laws and rules by various regulators have created regulatory overhang on certain subsectors. While the extensive roll out of new rules and regulations create short-term pain and impede growth of some of the listed companies in the near term, we believe the long-term benefits of stable and orderly development sectors affected far outweigh short-term earnings risks.

Taiwan & Korea:  As economic growth is expected to moderate from 2H21, we expect high quality technology stocks to outperform again. Earnings growth momentum of these companies remain strong and valuations appear reasonable at current levels.  In non-tech, we believe there is a long runway in the post-Covid recovery, particularly in countries with high vaccination rate.

India: As the latest COVID-19 wave appears to be easing, state governments have indicated that they will be taking a more measured approach to easing restrictions, suggesting a more gradual economic recovery ahead. We expect a downward revision in FY22e earnings estimates before seeing a recovery in FY23e.

ASEAN: The recovery in most Southeast Asian countries is now looking more subdued following the resurgent of COVID cases in the region. The spread of more infectious strains amid slow vaccinations has taken its toll on the economy of this region.

Overview: Emerging market (EM) equities recorded a marginal gain in June. The MSCI Emerging Markets Index posted a positive return but lagged the MSCI World Index with US dollar strength a headwind. Higher than expected headline inflation in the US and a more hawkish tone from the Federal Reserve (Fed) added to concerns over the timing of global monetary policy tightening.

Colombia was the best performing index market, aided by crude oil price strength, followed closely by Brazil. The Brazilian real recovered as the central bank raised interest rates, and currency strength amplified gains in US dollar terms. Higher crude oil prices were also supportive of Russia and Saudi Arabia.

Chile and especially Peru, recorded negative returns, both impacted by political uncertainty. China, where regulatory concerns broadened beyond the technology sector, posted a positive return, but underperformed the broader index.

Outlook: A return to normality is gathering momentum across the world as vaccines are rolled out, enabling economic recovery. The transition out of the pandemic is progressing, but many EM continue to lag developed markets with regards to the roll-out of vaccines.

Global policy support has been highly accommodative but is now beginning to moderate. The Fed has adopted a more hawkish tone and we may see tapering from developed market central banks more broadly next year.

China’s economy has normalised post the Covid-19 pandemic and stimulus had begun to be gradually withdrawn. However, the authorities unexpectedly announced a reserve ratio requirement cut for banks in July. The move suggests that growth concerns in some areas of the economy persist.   

Risks: Risks to the outlook include the emergence of new Covid variants, which could delay the recovery. The path of inflation and the implications for policy, especially as we move closer to the announcement of Fed tapering, will also remain key.

Source: Schroders. 2021 July. 

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.

Fixed Income

U.S. Treasury yields rose steadily for much of past one year as investors priced in improving economic conditions and rising inflation. While short-term bond yields remained low, intermediate- and long-term yields rose notably, leading to a steeper yield curve. Sector performance was mixed—high-yield corporate bonds posted double-digit gains, while U.S. Treasury bonds declined due to their greater interest-rate sensitivity#.

Preferred securities posted strong returns for past one year. Retail par preferreds returned 14.46%, outperforming institutional par preferreds which return 9.56%. Convertible preferreds returned  29.84%, while the S&P 500 returned  over 40%#.

A global economic recovery is underway in 2021, and the utility, energy, communication, and consumer cyclical industries stand to benefit significantly. Utility common equity valuation multiples are the lowest level of the last ten years. We believe convertible preferred securities of utility issuers will benefit as valuation multiples rise. Global oil prices have rebounded into the $70s from negative prices in 2020#. Midstream concerns of counterparty credit risk and low volumes have abated, strengthening midstream credit profiles. Residential and commercial broadband demand is at an all-time high, improving the credit outlook for communication issuers. And consumer cyclical issuers should benefit from increased consumer spending levels and positive implications of the pending infrastructure spending legislation.

We remain overweight towards the utilities sector which has limited exposure from an economic standpoint to the coronavirus. Commercial and industrial electricity demand has declined but at the same time, residential demand increased as many Americans continue to work from home.  Importantly, utilities often make between 2-3 times more margin from residential customers than they do commercial and industrial. In addition, most utilities have regulatory mechanisms in place to make up for lost demand. We see tremendous value in the utility preferred space as many of these securities are not trading on their underlying fundamentals. Further, we believe that President Biden will incentivize renewable energy investment which will result in even better earnings and cash flows for the next several years. 

Financial services companies, another large weighting in the portfolio, are well positioned from a balance sheet standpoint for this crisis. US banks are strong, well-capitalized with good liquidity. During the 2008-09 financial crisis, banks were forced to tighten their lending standards because of their weak balance sheets. Insurance companies, regulated by the states where they operate, similarly are well positioned from a balance sheet standpoint currently. P&C insurance companies are benefitting from increases in premiums paid as these companies have been raising prices owing to several years of higher-than-expected claims. We see value in the financial services sector as the market is not recognizing their strong balance sheets.

# Bloomberg. As of 30 June 2021. Preferred measured by the ICE BofAML US All Capital Securities Index; high yield corporate bond measured by by ICE BofAML US High Yield Index.; US Treasuries measured by ICE BofAML US Treasury & Agency Index. retail par preferreds measured by ICE BofAML Core Plus Fixed Rate Preferred Securities Index; institutional par preferred measured by ICE BofAML US Capital Securities Index; and convertible preferreds measured by ICE BofAML US Convertible Preferreds Index; Past performance is not indicative of future results.

Over the past quarter, global vaccination rollout and economic reopening have been the major drivers of return for emerging markets (EM).  The EM debt range sustained a positive trend of relative performance in the quarter, continuing the success it has held for over a year.

In June, China witnessed deceleration on the manufacturing side.  Non-manufacturing sectors were potentially impacted by new waves of COVID cases, so was the rest of the Asian EM markets.  However, the pace of vaccination is increasing in Asian EM economies.  Central and Eastern European EM markets are strongly supported by the recovery in the European Union.  In Latin America, Colombia is impacted by protests, whereas Brazil and Mexico continue the path of acceleration.

We expect EM growth to remain elevated, with the recovery improving on vaccination and more resilience to lockdowns.  The biggest risks to EM debt remain within developed markets and core US treasury yields.  We see EM inflation peaking, although the pace of post-peak disinflation is less clear.  This suggests that financial conditions may tighten from current levels.

The corporate space is expected to be led by commodities and cyclicals.  We believe that net leverage is nearing 2018 levels, probably leading to rating upgrades and lower default rates.  Refinancing risks are also manageable, with new issue market being active and funding costs remaining at attractive levels.  Returns will likely continue to be driven by duration.

In terms of strategy, we maintain a slightly short duration position.  On the geographical front, we continue to remain overweight in Latin America, balanced against underweights in Eastern Europe and Asia.  Diversity is always the centrepiece when we explore EM opportunities – a variety of markets will likely exhibit the impact from different policy choices, and as a result differentiation in policy sustainability will be a key feature.

The information contained in this document does not constitute investment advice, or an offer to sell, or a solicitation of an offer to buy any security, investment product or service. Informational sources are considered reliable but you should conduct your own verification of information contained herein. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.

Investment involves risk. Past performance is not indicative of future performance. Please refer to the offering document(s) for details, including the risk factors before investing. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.


China equities moved higher for the past 1 year amid market experienced high volatility. In the second half of 2020, Chinese equity rebounded on the back of healthy economic and positive corporate earnings. Turning to 2021, Chinese equities moved marginally lower for the first quarter on the back of positive economic indicators. In the second quarter, Chinese equities rose on strong first-quarter earnings. Chinese equities rebound further from mid-May and the effect of style rotation from growth to value seemed to diminish. Hong Kong equity also moved higher during the year thanks to improving economic outlook.

On the policy front, the key directives for Greater Bay Area (GBA) following President Xi’s visit to Shenzhen in October 2020 was also released, with continued emphasis of cultivating innovation and enhancing interconnectivity in the region. Implementation details of GBA’s pilot wealth connect programs were released in May where qualified GBA residents are allowed to buy eligible wealth management products on the other side. The policy tailwind fostering GBA’s development continues to contrast with the tighter regulations on national level in selective sectors such as internet, e-commerce and education.

Looking forward, we believe focusing on GBA region will continue to provide differentiated exposure to investors, thanks to the niche investment universe that focus on regional champions with their own growth dynamics not overshadowed by nation-wide giants. On the equity side, we continue to focus on the four investment themes, namely finance/real estate, R&D/innovation, consumption upgrade and infrastructure. Sector-wise, we believe financials sectors will be the key beneficiaries of the upcoming GBA Wealth Connect Program. We are also positive towards quality industrials companies that fit into the infrastructure and innovation investment themes.

On the fixed income side, we believe to be invested across a diversified range of sectors could help buffer against potential geopolitical risks even though COVID-19 risk appears to be gradually reducing. In terms of sector, we expect the property sector could continue to provide better risk-reward opportunities in the GBA-related universe. We also like selective opportunities in high yield non-property sectors with strong fundamentals.

On strategy level, while targeting on specific stock opportunities within the key GBA investment themes could help capture capital appreciation, to keep adequate portfolio diversification between equity and fixed income could potentially provide investors stable interest income and steady total return at low volatility, especially during times of market swings. 

1. Source: Manulife Investment Management Multi-Asset Solutions Team (MAST) in Asia, as of 28 May 2021. Projections or other forward-looking statements regarding future events, targets, management discipline or other expectations are only current as of the date indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different than that shown here. 

2. Source: Manulife Investment Management Multi-Asset Solutions Team (MAST) in Asia, as of 28 May 2021. Projections or other forward-looking statements regarding future events, targets, management discipline or other expectations are only current as of the date indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different than that shown here.

Disclaimer – Quarterly Asset Allocation Views

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

This material was prepared solely for educational and informational purposes and does not constitute a recommendation, professional advice, an offer, solicitation or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. The economic trend analysis expressed in this material does not indicate any future investment performance result.   This material was produced by and the opinions expressed are those of Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. Past performance is not an indication of future results. Investment involves risk, including the loss of principal. In considering any investment, if you are in doubt on the action to be taken, you should consult professional advisers.

Proprietary Information – Please note that this material must not be wholly or partially reproduced, distributed, circulated, disseminated, published or disclosed, in any form and for any purpose, to any third party without prior approval from Manulife Investment Management.

This material is issued by Manulife Investment Management (Hong Kong) Limited. This material has not been reviewed by the Securities and Futures Commission (SFC).

Disclaimer and Important Notice - Quarterly Fund managers’ Views

The relevant information is prepared by relevant fund house(s) for information purposes only. The contents are based on information generally available to the public from sources reasonably believed to be reliable and are provided on an "as is" basis but have not been independently verified. Any projections and opinions expressed therein are expressed solely as general market commentary and do not constitute solicitation, recommendation, investment advice, or guaranteed return. Such projections and opinions are subject to change without notice and should not be construed as a recommendation of any investment product or market sector.

The opinions as expressed in the relevant articles do not represent those of Manulife Investment Management.

Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein.

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