Yun, who influences fund selection at BMO Private Bank, told FSA that low interest rates are expected to remain low, and dividend-paying equities, as well as bonds with returns higher than investment grade paper are the themes he likes.
“We are focused on consistency, specifically, the theme of sustainable dividend growth on the equity side. That could be global, Asian or US equities. The reason is that under a low growth, low inflation environment, which has been the case for the last 6-12 months, the dividend theme becomes crucial.”
BMO has both advisory and discretionary mandates in Asia. On the advisory side, it carries 20-plus fund houses registered in Hong Kong. Fund selection for the adviosry business is done in Asia, and for discretionary, it’s done at the bank’s headquarters in Toronto.
Defensive on Europe
In terms of risk this year, Yun cited the Brexit vote coming up in June. His view echoes the recent strong warning from the IMF, which said a UK exit from the EU would cause “severe regional and global damage” by disrupting trade.
“Although the pound has weakened, the market hasn’t really discounted the possibility of an exit from the European Union,” Yun said. “At the end of the day, the majority think that the UK will remain in the European Union, and that’s a macro risk.”
BMO’s European strategies in discretionary portfolios are therefore positioned defensively, he said.
“We try to find companies that benefit from the consumption trend or benefit even if the UK votes to leave Europe, such as sustainable dividend growth stocks.
“On the bond side we do not go into a lot of UK banks, but prefer European banks, such as French and Dutch and German, which will likely benefit from a Brexit.”
Turning sectors
In the past 12 months, in equities, the energy and banking sectors have been negatively impacted. However, Yun is considering an allocation adjustment, as both sectors may be on the verge of turning.
“We’ve already put an underweight on energy, but we are inclined to move that to neutral. If we believe $26 per barrel was the bottom for oil, then that means six months from today there should be some turnaround as the industry consolidates. The strong players will profit and that should drive earnings.”
In the banking sector, the low interest rates and negative rates in Europe and Japan have created a low-growth, low-margin scenario this year for banks, he said.
In addition, investment bank fees came down in the first quarter, the potential for energy company defaults remains and banks will be facing upcoming regulatory fines.
“We are positioned conservatively in the financial sector in the short-term. But 12 months from now that could change. If oil goes to the $40-$50 range, inflation will pick up, long US treasury yields should steepen, with the 10-year going above 2%.
“That would enhance the overall interest margin of the banking sector. Banks in the second half therefore could start to perform better.”
In fixed income, Yun tries to find funds that deliver a return higher than an investment grade bond, though it hasn’t been easy.
“Now high yield is only fair value and maybe it’s not the time for exposure. Once energy companies deliver results, you may get a coupon return in most high yield. Investment grade bonds are only seeing a coupon-type return this year, which means 3-4% at most.”
China catalysts
Yun has tempered optimism about China investment, and said some market catalysts are coming. If the MSCI decides in June to include A-shares on the MSCI Emerging Markets Index, China’s markets will benefit.
“If they decide to include A-shares, it will probably be on a gradual basis, maybe over three years. That will help with liquidity and we’ll see much more research done on Chinese companies.”
Adding momentum to the possible MSCI inclusion is the Shenzhen-Hong Kong Stock Connect, expected sometime in 2016.
“Shenzhen is a technology sector exchange compared to Shanghai. Valuation-wise, Shenzhen is more expensive than the technology companies listed in Hong Kong, so there will likely be a valuation imbalance that should adjust to boost Hong Kong listed companies.”
His wealth management clients aren’t as concerned about China as some analysts in developed markets are, he added.
