“A shift to lower interest rates in the US would signal a peak for the US dollar. A weakening dollar would help boost returns from emerging Asia equity markets, including China’s markets,” said Ken Peng, head of Asian investment strategy at Citi Private Bank, at a Hong Kong media event yesterday.
“The renminbi is on the cusp of a directional shift. In the worse case, it might depreciate if the trade dispute with the US escalates further, or [more logically] it will gain in value as investors focus instead based on the bond yield premium payable on China government bonds (CGB),” he explained.
The five-year CGB trades with a yield of 3%, compared with about 1.7% on the five-year US Treasury note. Moreover, US Treasury yields are likely to fall further if the Federal Reserve continues its policy of purchasing government bonds, which it resumed in February after a brief hiatus, Peng added.
He also likes offshore China bonds issued by top tier property companies, large state-owned enterprises, and municipal governments with vibrant local economies.
“The central government is likely to introduce further fiscal measures which, combined with the monetary stimulus provided by the Peoples Bank of China (PBOC) that started last year, will continue to be supportive of these sectors,” he said.
China equities
Meanwhile the fundamental case for China equities remains solid.
“The rise of the Chinese consumer in the medium- to long-term will benefit not only China equities but all developed market equities markets, as companies throughout the world find new markets to enter,” said Steven Wieting, Citi PB’s chief investment strategist and chief economist.
“Trade friction will dampen some sections of the Chinese market in the short-term, but there are good opportunities for investing in the stocks of companies that provide goods and services for the consumer.”
Wieting emphasised the growth of China’s middle class and its increasing demand for tourism services, upgrades to healthcare and for more sophisticated discretionary goods.
“Investors should focus on companies that benefit from domestic spending rather than exports that are potentially vulnerable to the trade tariffs,” he said.
Wieting also stressed the structural shift underway that is pivoting the world’s economy eastward.
Emerging Asia makes up 11% of global market capitalisation, compared with the US’s 55%. Yet regional GDP, which accounts for half the world’s total, increasing longevity and rising wealth all suggest emerging Asia should be a far larger component.
“Global investors are significantly underweight emerging Asia [including China] equities,” he said.
Following its GIC meeting earlier this month, Citi PB has a modest overweight to emerging Asia while de-risking its global portfolio, and “taking advantage of US fixed income yields far in excess of other developed markets”.
The bank estimates 17-20% total returns (in US dollars) for global equities this year “if the trade threats are set aside”. If they’re not, then 6-8% is more likely.
“Trade protectionism remains a risk that can significantly sway corporate profits and the world economy,” said Wieting.
As a result, he advises investors to stay globally diversified and choose a bearable risk tolerance, while safeguarding assets.
Citi Private Bank Asset Allocation
| Asset Class |
Weighting |
Change since Jan 2019 |
| DM large cap equities |
27% |
-1.4% |
| DM small/mid cap equities |
4.1% |
-0.7% |
| EM equities |
4.7% |
0.1% |
| Global equities |
35.8% |
-2% |
| DM govt. bonds |
23.7% |
-1.4% |
| DM IG bonds |
10.7% |
2.1% |
| DM HY bonds |
2% |
– |
| EM bonds |
3.4% |
0.9% |
| Global bonds |
39.8% |
1.5% |
| Hedge funds |
11.8% |
– |
| Private equity |
5% |
– |
| Real Estate |
5% |
– |
| Cash |
2.5% |
0.5% |
