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Manulife InvestChoice – 2022 Q3 Asset Class Outlook

July 2022

Quarterly Asset Allocation Views1

Equities

Tactically cautious with increased use of risk-management tools and equity futures to manage volatility. Equities are close to neutral/slight overweight tactically, albeit with some marginal changes across allocations expected over the quarter. Sentiment indicators are very bearish. The Russia-Ukraine situation (and its repercussions) amount to a stagflationary economic shock, impacting a global economy already suffering from painful inflation and signs of a looming growth slowdown. Inflation prints remain elevated, and the market expects another ~200 basis points (bps) of hikes during this cycle, most of which will be frontloaded. This will remain a headwind for risk assets until growth concerns dominate the US Federal Reserve's (Fed) decision making, which could alleviate some pressure on riskier asset classes.

 

Energy, metals, natural resources as well as relatively more defensive, low-volatility, income-oriented equities have stood out. We are relatively more positive towards US dollar (USD) assets (given they will experience less of a growth impact from sanctions against Russia versus other regions), select Asian and broad global-dividend equities, and agriculture (commodity-exporting markets, such as Indonesia, Thailand, Philippines, Australia).

  • The investment risks that have dominated so far this year have not dissipated. Tight labour markets, supply chain disruptions, energy, and commodity-supply shortages all continue against a backdrop of high and rising inflation that central banks have not yet tamed. Interest rates will have to rise further across developed and emerging markets to ensure inflation expectations remain in check.
  • The front and centre concern by the US voter profile will likely drive the Biden Administration’s pressure on the Fed to continue to rein in inflation. Meanwhile, the growth repercussions and potential job losses that may become more of a focus in the latter part of the year are still not being overly felt.
  • In the near term, the Fed will likely continue with an aggressive rhetoric, rather than finesse its hike profile. However, we do believe growth concerns will become more a dominant factor in the Fed’s decision making in the latter part of the year, which will see the Fed guide towards a slowdown in its already aggressive move towards neutral rates.
  • As a result of the Russia-Ukraine situation, lower growth and higher inflation resulting from elevated commodity prices and uncertainty are likely to derail any short-lived momentum. Global growth forecasts are being reduced, with Europe most vulnerable. The notion of transitory inflation has gone: sanctions represent a strongly pro-inflationary, supply-driven shock, introducing stagflation risks, whilst yield-curve inversion signals weaker macro conditions.
  • Pervasive geopolitical uncertainty, downside risks to growth, and upside pressures on inflation underpin caution regarding earnings and valuation expectations.
  • Levels of uncertainty would suggest continued heightened volatility lies ahead. In the current environment, it is as vital as ever to retain a clear, consistent strategic perspective while navigating extreme turbulence. This is not a temporary event, and we do not expect a swift resolution. Until complex geopolitical risks recede, we anticipate continuing heightened market volatility.
  • Given weaker economic growth momentum and ongoing geopolitical uncertainty, we expect equity markets to experience heightened volatility. However, markets with significant exposure to energy and materials (as inflation hedges) and low volatile, defensive attributes of consumer staples/utilities and broad dividend names may find some insulation.

Fixed Income and Alternatives

Hedging duration risk through bond futures. Given the weak return profile of government bonds, coupled with the fact that the balance of risks is slightly to the upside (for yields), we maintain a modest underweight duration. In the long run, we believe that yields will continue to move modestly higher as the Fed continues to tighten its monetary policy, further warranting an underweight exposure to the asset class. Inflation is also undermining cash holdings. Credits remain a preference with spread opportunities in Asia and still attractive yields within US fixed income given a resilient US economy. Given attractive valuations, EM debts could begin to look attractive over the medium term, but we currently have less conviction here.

  • Initially, we expected the year to begin with the uncomfortable combination of sticky, high inflation and moderating growth before transitioning to a higher growth profile with more moderate inflation levels in the second half of 2022. However, another stagflation shock makes the prospect of a return to “Goldilocks” conditions by the year end look less than solid.
  • The market is pricing in a hawkish Fed, whilst sentiment is arguably at extreme bearishness. We believe the Fed will eventually have to pivot away and guide for fewer hikes than the market is pricing, as growth begins to moderate in 2H22.
  • Retain “Underweight Duration” stance due to a broadening of the rate-tightening cycle by numerous central banks. However, whilst inflation persistence continues to build and is a concern, eventually, growth-slowdown dynamics brought about by tightened financial conditions will present, thereby requiring a nimble approach.
  • We prefer front-end and “belly” rates on the US Treasury curve, owing to curve flatness and rate-hike discounting.
  • Opportunistically managing duration and fixed-income exposure via both short-put Treasury futures and vanilla Treasury futures.
  • In credits, we believe the US high-yield market has the potential to deliver relatively better performance versus risk assets, like equities, as it is better compensated under rising inflation. Also, US high yield has a lower default potential, as these bonds have greater exposure to oil and gas sectors and a relatively stronger US economy. Heightening recessionary risks would impact the market view on default rates and likely lead to pressure on spreads (widening).
  • Meanwhile, floating-rate bonds (beneficiaries of a rising rate environment), China renminbi government bonds (a stable exchange rate and higher coupon rates), and preferred securities (a fixed income-like product with higher coupon rates) are also expected to be more resilient than risk assets.
  • We view commodities from two perspectives, both as hedges and diversification tools, and we expect commodity prices, such as oil/refiners and agriculture products, to remain elevated due to supply disruptions and geopolitical tensions. Commodities with inflation-hedge properties, like precious metals, oil/refiners and farm products will perform better.

Cash

We believe the low short-term rates make cash a relatively unattractive asset class.

Quarterly Fund Managers’ Views

Below market views are provided by the respective fund house.

Equity



China’s policy tailwinds set economic recovery in motion

We see a brighter outlook for Chinese equities in the mid-year ahead with opportunities arise in three investment themes: policy tailwinds, innovation, and consumption upgrade. We remain constructive and believe that longer-term investors will be rewarded for participating in these sectorial opportunities.

We expect that for the remainder of this year, China should see a re-acceleration in GDP growth. We believe China still has room to ease monetary policy further amid below-target inflation and support for the labour market. In terms of fiscal policy, there is a decent probability that China’s National People’s Congress Standing Committee August meeting may approve additional fiscal stimulus.

For Taiwan market, the Taiwanese technology sector has a high correlation with global tech sector. In longer term, we remain convicted on the semiconductor upgrade cycle. However we expect short-term volatility.

We identify three key investment themes for the mid-year that continue to benefit from continued policy support.

  1. Policy tailwinds
    China has been making promising progress in tapping clean and alternative energy. We continue to see solid investment opportunities in the renewable energy sector. For example, China makes 87% of the world’s polysilicon (a vital component of the solar supply chain) installed capacity.1 Another beneficiary of policy tailwind is the auto sector, a key contributor of China’s consumption growth. We expect Chinese automakers will continue to accelerate their production and deliveries from June 2022 in anticipation of a demand recovery. 
  2. Innovation
    With the growing adoption of renewable energy, such as solar and wind, we expect demand for battery storage of renewable energy or energy storage systems (ESS) to rise. Indeed, China’s installation of ESS is expected to grow at a 56% cumulative average growth rate over the next decade.2 In the longer term, we believe China will play a pivotal role in the global electric-vehicle (EV) supply chain, with EV battery manufacturers leading the way.
  3. Consumption
    With stimulus measures underway, we expect consumption growth to pick up in the year's second half. China’s travel, tourism, and hotel stocks are rebounding after the government announced the relaxation of travel rules and reopening of city lockdowns.3 Domestic consumption-related stocks including restaurant operators and local retail businesses are also benefiting as the government relaxes quarantine times for close contacts.

1 BNEF, BofA Global Research, as of April 2022
2 Daiwa, as of January 2022.
3 Bloomberg, 30 June 2022.

 

The ongoing Russia-Ukraine conflict, rising inflation and yields, and China’s domestic growth challenges have led to choppy trading in Asia’s stock markets. Still, Asian dividend stocks have remained relatively resilient, supported by economic and corporate earnings growth.

The conflict in Ukraine and other nations’ response to Russia are exacerbating the global supply shortage of oil, gas and other commodities, adding pressure to inflation in a number of markets and dampening the outlook for Europe. Geopolitical uncertainty will likely persist in the near future, but we believe Asia’s economies will continue to reopen, supporting corporate earnings growth alongside reasonable valuations, boding well for our Asian Equity Dividend Strategy.

We see opportunities in three types of Asian dividend-paying stocks:

  1.  Value: financial stocks such as banking and insurance currently present undemanding valuations, and stand to benefit from a rising interest rate environment. Meanwhile, return-on-equity is generally a key focus, supporting potential dividend payout over the longer term.
  2. Quality-at-reasonable-yield (QARY): These companies generally present robust earnings growth momentum and a sound dividend record, driven by good corporate governance, effective cost management, and the ability to maintain pricing power. For example, digitalisation and the deployment of 5G are driving robust chip demand for smartphones and the Internet of Things, benefiting leading players in the semiconductor sector.
  3. Defensives, or bond proxies: Asian real estate investment trusts with sound fundamentals generally have lower volatility while presenting more yield opportunities than US Treasuries.

Diversification remains key in the Strategy and we can harness multiple dividend opportunities in Asia Pacific, while navigating different market conditions. From a theme perspective, we are currently more exposed to dividend-paying stocks which sit in our value categorisation, to capture opportunities amid rising rates. Geographically, we continue to remain overweight in Hong Kong, Singapore and Australia, as these markets offer some higher quality businesses which will weather the uncertain environment more effectively, whilst presenting some attractive income opportunities.

Diversification does not guarantee investment return and does not eliminate the risk of loss.

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. The Strategy is actively managed; holdings, sector weights, allocations and leverage, as applicable are subject to change at the discretion of the Investment Manager without notice.

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.

Fixed Income



Asian Fixed Income: Resilient opportunities in diverse Asia

The inflationary outlook in Asia is generally more benign than that of developed markets. Some economies in Asia are relatively self-sufficient and less susceptible to cost-push inflation arising from supply chain disruption and higher commodity prices. We believe that Asia may offer pockets of opportunities for fixed income investors.

We expect to see a greater diversity in the pace and magnitude of monetary policy tightening across the region, and when compared to the Fed and other developed-market central banks, generally a less hawkish central bank stance should support selective Asian fixed-income markets.

Southeast Asia has emerged as a potential bright spot amid rising stagflationary fears from global investors, as several markets have recorded faster-than-expected GDP growth. This is due to a pick-up in tourism, re-opening of economies, and strong commodity exports . 1The faster growth boosts consumption in some Southeast Asian economies, which the pace of growth could potentially outpace inflation .2 Such expectation contrasts with some developed markets that face growing stagflation and recessionary risks.

Segments of Asia ex-China high-yield space are worth looking into, as these issuers are trading at relatively attractive levels on an absolute yield basis (yield levels have risen to 8%-9%) after the correction among global credits spurred by rising macro headwinds and weak sentiment globally. We are currently constructive on Indian renewable energy credits in this space as the country seeks to improve energy self-sufficiency and meet its goal of “net zero” emissions by 2070. Given the lingering volatility in the markets across all asset classes this year, the primary market in the ESG space might continue to see muted volumes but we expect a more diversified set of issuers to come to market over the rest of the year. This should provide us with further opportunities to build upon the portfolio’s exposure to issuers that demonstrate superior sustainability attributes in both the primary and secondary markets with potential compelling valuations.

In 2022, about two out of every five US dollar Asian credit new issues were an ESG bond, more than that in 2021. In addition, some regional governments have fast-tracking plans to issue their first green bonds as numerous countries have made ambitious ‘net zero’ pledges over the past year. One example is Indian renewable energy credits, of which the country seeks to improve energy self-sufficiency and meet its net zero emissions goal by 2070.

In the current challenging environment, investors may find selective opportunities from the diversity offered by Asian fixed income markets. Amid the volatile US rate movements in the first half of the year, Asian credits offer higher yields and have presented relatively attractive entry points for investors to dollar average and tap the pockets of cyclical and structural opportunities over the medium-to-long run.

1 South-east Asia bucks global stagflation trend as tourism and exports climb | Financial Times 

2 Financial Times, 21 June 2022.

American Income Market Outlook: Is It the Time to Invest?

In 2022, economic growth has so far been moderate, and the conflict between Ukraine and Russia has pushed up the price of oil, natural gas, and some crops, affecting the economic performance of emerging markets and Europe. However, as the COVID-19 pandemic gradually stabilizes, the re-openings and increases in wages and consumption will become the driving forces for economic growth. Against this backdrop, we believe there are numerous investment opportunities in the current American income market.

US and Emerging Market Bonds Look Appealing

Due to the cautious attitude of US companies, there have been no active mergers and acquisitions or stock buybacks even at the end of the economic cycle, preventing corporate borrowing ratios from skyrocketing. Following the challenges of 2019, most companies now have strong fundamentals. We estimate that the default rate on US non-investment grade bonds will approach 0% by the end of this year. Looking back over the last few years, emerging market returns have been competitive, especially since their yields have now reached a historically high level. The investment value of emerging market bonds has also increased significantly, making now an excellent time to invest.

Bonds Demonstrate Resilience Despite Market Volatility

Due to factors such as interest rate hikes and rising market volatility, investors may want to wait for a better opportunity to enter the market, however, it has largely reflected investors' fears of the US Federal Reserve Board's hawkish stance. The current leverage ratio of bond issuers is still at a historically low level, and bond fundamentals are strong. If investors continue to focus on equity markets, they may face increased volatility in the future. If interest rates continue to rise, the stock risk premium may be discounted, the price-earnings ratio may fall, and valuations will be significantly adjusted. 

Inflation Benefits the Corporate Lending Market

Corporate debt costs have locked in previously lower interest rates, but corporate assets will increase in value with inflation, reducing overall leverage. Rising interest rates may have a short-term impact on bond prices, but investors' long-term asset value may be eroded by inflation if they exit the market. As a result, higher interest rates may provide better bond market opportunities.

Source: AllianceBernstein

The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor's personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer of solicitation for the purchase or sale of, any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.

Investment involves risks. This document has not been reviewed by the Securities and Futures Commission. The issuer of this document is AllianceBernstein Hong Kong Limited (聯博香港有限公司).

©2022 AllianceBernstein L.P. The [A/B] logo is a service mark of AllianceBernstein and AllianceBernstein® is a registered trademark used by permission of the owner, AllianceBernstein L.P.

 

Multi-Asset



As we look back on the first half of 2022, it’s hard to overstate how extraordinary global macro and markets have been. From a macroeconomic perspective, since the beginning of the year, we’ve experienced a devastating conflict in Europe, a COVID-19 crisis in China, and, most notably, an extremely hawkish U.S. Federal Reserve (Fed). 

Barely six weeks after Fed Chair Jerome Powell noted that Fed officials weren’t actively considering a 75 basis points (bps) interest-rate hike, the FOMC delivered just that on June 15. Cryptically telegraphed to the markets a few days before the June Fed meeting, the key takeaway in our view is receiving confirmation—albeit indirectly—that the U.S. central bank will knowingly hike into a material economic growth slowdown to tame inflation. Make no mistake: We’re witnessing the Fed implement its most aggressive monetary policy tightening cycle in decades. The global growth outlook has become more challenging, and prospects of achieving a soft landing have dwindled. 

We remain in a challenging environment for global markets - growth and earnings could disappoint due to growing global logistical challenges, but also due to the growing pressure on policymakers to reduce their stimulus efforts in the face of rising inflation. The market is pricing in an aggressive hawkish Fed, whilst sentiment is arguably at extreme bearishness..

Tactical positioning will be more prevalent again into 2022, to be able to nimbly add and de-risk portfolios as well as add to yield opportunities as they arise. Overall, we are tilted towards higher rates from here and stable spreads, but see yields keeping contained given the potential for macro data disappointments.

In a higher-rate environment, we capture income via exposures to high-yielding bonds. Although bond prices typically fall under higher rates, this can be mitigated by managing the interest rate sensitivity (or duration) exposure. In theory, high-yield bonds are less sensitive to interest-rate rises, hence can be more cushioned against a significant rise in rates. A bottom-up security selection approach to income harvesting allows us to invest into the corporates that can maintain their businesses in this type of environment, whilst providing a sustainable fixed income coupon or dividend yield. In the last six to eight months as of June 2022, for example, the team have been less focused on EM debt but rather having a preference for increased allocations towards US credit because of low US default rate expectations, a relatively stronger US economic backdrop and hence a stronger US dollar, covid-19 concerns in EM, as well the ongoing impact on debt markets around issues in China and Russia.

Our global multi-asset diversified income approach is not reliant on the continued growth of equity or fixed-income markets. We will remain focused on generating higher, sustainable natural yield from a range of assets with lower correlations and expected relatively lower volatilities than strategies that are more reliant on asset appreciation.

We believe the search for income will continue, and remain an attractive segment for investors. Yields are now higher for income investors to capture a higher income versus prior months, spreads are wider, offering potentially attractive spread opportunities, whilst equities are markedly lower, pricing in an already challenged set of headwinds that could provide recovery opportunities over the next 12-18 months.

 



Rising bond yields can't catch up with inflation

Investors increasingly find themselves navigating unchartered waters marked by high inflation, hawkish central banks, pandemic-related supply chain disruptions, an uncertain geopolitical landscape and growing risks of a significant economic slowdown. For households in most advanced and emerging markets, the higher cost of living comes as falling real wages may eventually crimp consumer spending.

Diversify your income sources

It is essential for investors to look beyond traditional assets for income. A hybrid multi-asset portfolio with below characteristics will likely help investors to seek income regardless of market conditions.

- Ride on US market dynamics

Despite challenges in the US equity and fixed income markets on the back of a rising rate environment, US corporations are faring well so far in 2022, we believe the growth trend is here to stay and will be long-term

- Dynamic asset allocation

A portfolio that strategically invests in stocks, bonds, and convertibles, with no set proportions on asset allocation. This flexibility allows the portfolio to adjust in search of the most attractive investment opportunities in any market conditions.

-  Broad diversification among sectors

Sectors such as utilities, health care and financial have been resilient during recent volatility. A portfolio with flexibility to adjust among sectors will provide growth potential and downside protection. 

- Stable Income Stream

Some products in the market have been providing regular income by investing in companies and sectors with good fundamentals. Investors should consider this while manging their portfolio.

Stay active

Diversification of income sources should be top of mind as investors expand the search for yield amid choppier waters. Active management will be key to uncover opportunities in a wide array of regional markets and asset classes as well as navigate a more volatile market environment amid flaring inflation, economic and policy concerns.  

Source: Franklin Templeton. Data as of May 31, 2022

Copyright © 2022. Franklin Templeton. All rights reserved.

Franklin Templeton Investments (Asia) Limited is the issuer of this document. The comments, opinions, and estimates contained herein are based on or derived from publicly available information from sources that Franklin Templeton believes to be reliable. Franklin Templeton does not guarantee their accuracy. This document is for informational purposes only. Any views expressed are the views of respective portfolio management team of Franklin Templeton as of the date published and may differ from other portfolio management team/ investment affiliates or of the firm as a whole. The security provided (if any) is for illustration purpose only and is not necessary indicative of a portfolio's holding at any one time. It is not a recommendation to purchase, sell or hold any particular security. This document is not intended to provide investment advice. Investment involves risks. Where past performance is quoted, such figures are not indicative of future performance.

The underlying assumptions and these views are subject to change without notice. There is no guarantee that any forecasts expressed will be realized. This document has not been reviewed by the Securities and Futures Commission in Hong Kong.

Neither Franklin Templeton, its affiliates nor any officer or employee of Franklin Templeton accepts any liability whatsoever for any loss arising from any use of this document or its contents.  The information in this document is confidential and proprietary and may not be used other than by the intended user. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

1 Source: Multi-Asset Solutions Team (MAST) in Asia, as of May 2022. Projections or other forward-looking statements regarding future events, targets, management discipline or other expectations are only current as of the date indicated. The above information may contain projections or other forward-looking statements regarding future events, targets, management discipline or other expectations. There is no assurance that such events will occur, and the future course may be significantly different from 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.

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Disclaimer and Important Notice - Quarterly Fund managers’ Views

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