Invesco remains overweight bonds and prefers investment grade fixed income securities, its global markets strategist for Asia Pacific ex-Japan, David Chao, said during the US asset manager’s fourth quarter outlook.
“We continue to have a preference for bonds as an overweighting compared to equities. We continue to overweight government bonds in places like emerging markets as well as the US and UK, and from an investment grade demand, we like higher quality bonds, especially corporate investment grade.”
Much like most asset classes, fixed income has been under heavy selling pressure this year due to a variety of factors including the Russia-Ukraine war, economic slowdown, soaring inflation and tightening monetary policy.
However, Chao reckons that this year’s repricing has created pockets of opportunity for investors to reengage with the asset class.
“I continue to like long-term government bonds, especially in places like Europe, where we had negative real yields earlier. Some of the yields have come back. This significant bond sell-off we’ve seen recently makes long-term bonds really attractive at these levels,” he said.
The recent sell-off has even prompted some investors to reengage with high yield after a brutal year following the default by a number of Chinese property developers. Several asset managers have pointed to the fact that most companies that have survived took advantage of the surge in liquidity at the start of the pandemic to refinance, strengthening their balance sheets and extending out maturities, although Chao said he was more pessimistic about high yield given the macro backdrop.
Chao said Invesco was underweight equities in the US and Europe because of stretched valuations and near-term energy-related geopolitical headwinds respectively, although he said that China equities looked attractive at current valuations.
This contrasts with UBS Wealth Management’s recent decision to downgrade its outlook on China equities to neutral from most preferred. The Swiss private bank cited a number of headwinds including China’s zero-Covid policy and continued strain in the country’s property sector.
Pictet Asset Management also recently downgraded China stocks to neutral from overweight, noting that even though China equities were currently cheap, this was not enough to compensate for risks in the country’s property sector.
Chao pointed to China’s tech sector as being a potential bright spot given that Chinese tech companies currently trade at a significant discount to their US peers and the regulatory crackdown, which began two years ago when Ant Financial’s IPO was cancelled, was easing.
“With regards to China tech, we’re not through the regulatory woods yet but the bulk of the measures have already been instituted and we’re in this consolidation period,” he said.
Chao also said that the expected easing of quarantine requirements in Hong Kong would act as a catalyst for the city’s equities market after a moribund few years.