Uncertainties over global economic growth and rising geopolitical tensions related to the war in Ukraine and Sino-US frictions favour income-generating assets, according to Tai Hui, Apac chief market strategist at JP Morgan Asset Management (JPMAM).
“Although there is nothing certain, the income from bonds or fixed income is more predictable and the cash flow from the asset class is quite attractive when the world is going through a lot of uncertainties,” said Hui.
Within fixed income, he prefers high-quality bonds such as government bonds and investment grade corporate debt as the global economy risks spiralling into recession.
“Looking back to history, the contraction phase is particularly challenging for equities, whether in the US or in other developed markets. Meanwhile, Treasury tends to perform well in a recessionary environment relative to other types of fixed income. But in this case, mortgage-backed securities and investment grades are also asset classes that we prefer.”
Based on geography, JPMAM has started rotating into Asian fixed income as it believes a weaker dollar for the next 12-to-18 months should benefit Asian credits.
“The economic momentum in Asia and China looks more optimistic. Also, central banks across Asia, just like the Fed, are nearly done with raising rates. For instance, the Bank of Korea and the Reserve Bank of India have held rates unchanged,” he added.
Commenting on high yield bonds, Hui believes there should be better entry points maybe in the second half of the year when investors are able to capitalise on higher yields, potentially at double digits.
Within equities, Hui has his eyes on Asian companies, especially on more domestically-driven countries as opposed to exporters.
Although Taiwan and Korea have outperformed year to date, domestically-connected economies are likely to perform better for the rest of the year on the back of recovery in consumer demand, he said.
When compared with its Asian counterparts, Hui is less favourable towards equities in the US as he believes valuations are too expensive.
Moreover, he sees Chinese corporate earnings as having better potential growth given the risk of recession in the US.
