Posted inMulti-asset

Diversify to buffer inflation

Eastspring backs commodities and Asia fixed income in year of volatility.
Guan Yi Low, Eastspring Investments

Reversing a bullish view on equities last year, Eastspring Investments is now more cautious on the asset class compared with bonds.

Instead, the asset manager favours commodities amid the inflationary environment that is likely to continue into 2022.

“We would expect the overall multi asset portfolio performance to be relatively low compared with the last two to three years, but portfolios have to remain diversified in the inflation environment,” said Craig Bell, portfolio manager, Eastspring Investments.

“We should seek to add assets that perform well during inflation, [such as] property, commodities infrastructure. We are also looking seriously and closely at gold at the moment as gold typically outperforms during inflation and when the Fed starts to hike rates,” Bell added.

China onshore bonds

The other asset class which Eastspring favours is Asian fixed income, especially in the China onshore market.

The China onshore bond index returned more than 8% last year, driven by a combination of capital gain, falling interest rates, and the renminbi appreciating by almost 3% against the US dollar, and Eastspring expects the trend to continue.

“We believe domestic policy and domestic investors will continue to drive the performance of the onshore bond market,” said Guan Yi Low, head of fixed income, Eastspring Investments.

“This year we expect the central bank to continue with policy easing. This [should] offset the economic weakness resulting from a combination of the zero covid policy, as well as the weakening of the property sector.

Responding to worries over US interest rate hikes, Low thinks the any rate increases are likely to be short and relatively sharp with terminal rates plateauing at around 2% by 2024.

Given that inflation is peaking in Asia, Low believes the rate hikes would not have a dramatic impact on the Asian fixed income market compared with previous rate hike cycles, which makes Chinese onshore bonds a good asset class for diversification.

The Eastspring team’s views largely coincide with that of M&G’s, which also believes fixed income and infrastructure are the best hedge against inflation in 2022.

“Real assets do well during an inflationary period, and particularly now we’re having a strong push on infrastructure spending. This includes the renewables sector where we expect to continue to see a lot of opportunities,” said Fabiana Fedeli, CIO, equities and multi-asset at M&G Investments.

Schroders, which is also cautious on inflation, prefers commodities and energy stocks to capture the current expansion phase, while hedging inflation risk.

Part of the Mark Allen Group.