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.
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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.
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