Policy-driven reflation, compressed market cycles and policy risks are some of the key investment themes that investors should bear in mind throughout the second half of the year, says Vincent Chan, head of multi-asset at Fullerton Fund Management.
Against the backdrop of the ongoing Covid-19 pandemic, Chan says the firm expects a reflationary scenario, induced by increased government spending and the low interest rate environment that will continue to play out.
“Linked to the low interest rate environment, the second theme — short and compressed market cycles — is caused by new groups of investors, who have access to very low cost of borrowing. They invest and divest very quickly, causing the cycles to be a lot more compressed,” says Chan.
He is also flagging that there are policy risks from both the US and China. Over the past few months, China has clamped down on some of its biggest companies and pushed corporations to help combat growing inequality. The ongoing crackdown involved Internet and technology companies, private education firms and overseas listings. Hot favourites including Alibaba Group Holdings and Tencent Holdings were hit, with billions in market value destroyed.
“The Chinese Communist Party exhibited confidence through its 100th-year anniversary celebration. Moving forward, they want to achieve long-term goals that are aligned with their objectives, which include common prosperity. In that sense, we do see more changes in regulations that may not be shareholder-friendly,” says Chan.
However, China’s latest regulatory moves, while wide-ranging, is not a broad stroke affecting all profit-oriented companies. “Companies that are better aligned with the government’s social objectives such as energy efficiency will be very well-supported,” he says.
Meanwhile, at the Jackson Hole meeting — which took place at the end of last month — the US Federal Reserve has announced that it would likely begin tapering before the end of the year. However, the pace of monetary normalisation would stretch out over a longer period.
“The US is not the first country to raise interest rates this time around. Other countries like Brazil, South Korea and New Zealand have moved their policy interest rates higher to defend their currencies or due to domestic issues. However, it is important to note when the US would start their move because there will be implications for the rest of the markets,” says Chan.
For example, when the Fed announced that the move is going to be gradual instead of a sharp reversal, the greenback weakened across major currencies including Asian currencies. “This actually helped the Asian markets to rebound,” he says.
Against this backdrop, there are many opportunities and challenges that investors should look out for, says Chan. Opportunity-wise, markets are not uniformly affected by headwinds, which means the performances differ. For one, the return for the MSCI World Index in US dollar terms year-to-date is at about 18%. MSCI Asia ex-Japan, on the other hand, saw much lower returns year-to-date at 1.5%. “Therefore, investors should be selective in terms of markets and sectors to invest in,” he highlights.
By and large, investing opportunities at the current juncture are still centred around the equity space due to strong growth and very little risk of recession, says Chan. Although the valuations of the equity markets may look high, this asset class still provides investors with good value given the fact that interest rates are very low, he reasons.
Taking a medium-term view of a landscape facing no recession over the next 12 to 18 months, Chan says he would continue to favour growth stocks within the US equity space. However, he highlights that cycles are currently very compressed and violent swings would be present, which works out to the advantage of investors who adopt a total return approach.
Outside of the US, Chan sees opportunities in European equities, which have benefitted from the European Central Bank’s (ECB) progrowth stance. “We do not expect the ECB to reverse the policy anytime soon, as the European markets are not growing at the same pace. Germany’s unemployment rate, for example, is at around 5.2%, while Southern economies like Italy’s recorded an unemployment rate of close to 10%,” he says.
Chan adds: “In order to accommodate the weaker countries, the ECB has to keep interest rates very low. The liquidity injection is very conducive for growth and is therefore benefitting the equity markets there.”
Within Asia, most of the opportunities are within North Asia, where the domestic economies benefit from close trading relationships with China. South Asian countries, on the other hand, are unfavourable due to the economies struggling from insufficient fiscal stimulus, says Chan.
The case for total return
Although the low interest rate environment may encourage more income-oriented investors to seek higher-yielding assets, adopting a total return strategy is an alternative they should consider, says Chan. In contrast to traditional income strategies, the total-return strategy generates returns from capital gains in addition to portfolio yield.
To meet the growing demand for such strategies, Fullerton has launched the Fullerton Total Return Multi-Asset Income (TRMI) fund, which seeks to generate both capital growth and regular income by investing dynamically in a range of asset classes while managing downside risks.
“We recognise that the building blocks in the financial markets tend to be equities and fixed income. However, in this part of the market cycle, they are expensive and both asset classes are showing bubble-like conditions,” he says. “Using a total return multi-asset approach allows us to provide investors with the ability to switch out of the expensive asset classes and find opportunities in more affordable asset classes.”
Chan adds: “The other advantage of a total return approach is that it allows us to have more scope to generate return. Without being tied to a benchmark, we can find growth opportunities and tilt our exposures by country, sector or securities. This flexibility, on top of the ability to switch between equities and bonds, helps us to extract returns and also minimise risk by avoiding asset bubbles.”
The fund is designed to cater to investors in different stages of life with different payout options. There are three payout options: Class A, Class B and Class C. Class A is an accumulating share class, in which all dividends are reinvested for higher potential capital growth. This is suitable for working adults seeking asset growth over a longer time horizon.
Class B seeks to build accretive returns and provides investors with a moderate dividend monthly payout so that investors with family commitments may have an extra income stream. Lastly, Class C distributes portfolio gains and capital growth in the form of dividends at a fixed monthly payout of 6.88% per annum. This allows investors to receive a regular income that supplements their existing government or private retirement schemes in their retirement years.
According to TRMI’s July fund factsheet, the fund’s largest asset allocation is in equities at 56.3%, followed by fixed income at 32%, cash and cash equivalents at 8.9%, and commodities at 2.8%. Within equities, its top five holdings are chip maker Advanced Micro Devices at 3.4%, smartphone maker Apple at 3.2%, graphics chips maker Nvidia at 3.2%, financial institution Morgan Stanley at 2.6%, and software giant Microsoft at 2.3%.
Given how Fullerton expects the equity market to remain strong towards the end of the year, the allocation to equity will be increased from around 60% now to between 65% and 70% by end of the year, says Chan.
“We expect the reflation story to continue to play out. We’re hopeful that the virus will be managed and that the opening up of economies means that a lot of the companies can go back to normal,” he says. “Of course, the virus remains a risk, so we always have some downside protection in the event that the virus situation is worse than expected.”
Photo: Fullerton Fund Management
