Higher risk-reward investment strategy may have more appeal during period of consolidation
This could be a good time for private investors to take a fresh look at less obvious investment options, while still maintaining a balanced portfolio
The principle of a well-balanced portfolio dictates a prudent mix of asset classes, but it also allows for a proportion of picks towards the higher-risk end of the spectrum. And, with the next six months increasingly seen as a period of likely consolidation in major equity markets, private investors have particular reason to take a fresh look at some of the less obvious options.
“Potential opportunities, which may have higher inherent risk but offer a higher return outlook currently include emerging market equities and bonds,” says Fan Cheuk-wan, head of investment strategy and advisory, Asia, for HSBC Private Banking. “While emphasising that investors should remain prudent and globally diversified, we see ... tailwinds expected to drive Asian emerging market performance, even in currencies, and are slightly overweight towards Latin America.”
A detectable change in global risk appetite supports this prognosis, along with signs of sustained, synchronised economic growth, progress on structural reform and positive high-frequency data. At some point, a weakening US dollar is also expected to act as a favourable driver, with pending US interest rate hikes already fully discounted by the broader market and inflation expectations easing.
“That bodes well for emerging markets and translates into lower funding costs for countries which rely on US dollar debt financing,” Fan says. “In Mexico, especially, we see upside potential and believe the trade protectionism risk may offer a play. It has been over factored in by the market, but the underlying fundamentals remain resilient, and Mexico should benefit from the cyclical global economic recovery.”
In Asia, Fan has a preference for China and India, where the risk-reward profile “looks compelling” and where policy support, stronger corporate earnings and inflows of liquidity point to escalating returns.
Regarding other themes, she has a marked liking for health care, renewable energy, consumer discretionary and internet-related stocks. “China’s new economy sector is expected to deliver attractive investment opportunities in the next six months. Although valuations are fairly high, much stronger than average earnings growth continues to support valuation and reinforces our conviction. And, as the ‘next big thing’, I think investors should focus on the upcoming opening of China’s capital markets, which will have an impact on global asset allocation in the longer run.”
According to James Cheo, Bank of Singapore investment strategist, one option in a world where growth remains healthy, but risk assets are fully valued, is to look for returns through carry and rotation.
