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A look at HSBC PB’s `barbell strategy’

The strategy aims to capture emerging market yields and `new economy’ growth at a time when yield is hard to find, according to HSBC Private Bank’s Fan Cheuk Wan, head of investment strategy in Asia.

A hunger for yield in a low or zero interest rate environment is a common problem for global investors. At the same time, technology innovation holds out the prospect of hefty gains for investors who choose winning so-called “new economy” stocks.

Wan believes she has a solution to this conundrum.

“We recommend a barbell strategy with high dividend, non-cyclical stocks and corporate bonds at one end, balanced by high-growth new economy stocks, such as technology and healthcare at the other end,” she told Fund Selector Asia.

In addition, overweight exposure to alternative asset classes, such as hedge funds, property (including Singapore Reits) and private equity should provide a mix of capital gain and income, while gold offers a haven from political turbulence.

Asia income bias

For the income end of the barbell, Wan advises her high net worth clients to store up on short-to- medium duration emerging market sovereign and corporate bonds, in both hard and local currencies, with a strong bias towards Asia and especially economically buoyant India and Indonesia, rather than the Chinese property bonds that dominate the sector.

“Asian credits should benefit from resilient economic growth and interest rate cuts, while investors in local currency bonds should be protected by stable exchange rates,” says Wan.

Although underweight developed market government bonds, she also likes US investment grade and high yield corporate issues with medium durations, which should be supported by a steady domestic economy but subdued core inflation of 1.6%. A cautious Federal Reserve is likely to delay its next interest rate hike until June 2017, according to the bank’s house view.

Asia-Pacific equities

Wan’s strongest equity call is on new economy stocks, which make up the bulk of the growth end of her barbell strategy. These are companies in the US and emerging markets at the cutting edge of developments in the internet, technology, healthcare, clean energy and consumer services.

China is a fertile breeding ground for new economy stocks and will be more easily accessible to international investors when Shenzhen-Hong Kong Stock Connect goes live in a couple of months, she added.

More generally, Wan is underweight developed market equities, with the exception of the US where she particularly likes financial stocks trading at historically low valuations.

In Japan, Abenomics has failed to shift the economy out of its deflation trap, the central banks won’t provide “helicopter money”, and the yen is likely to strengthen to 95 versus the US dollar, further hurting exporters, she believes.

Meanwhile, European equities have been downgraded to underweight since the Brexit vote in June due to the risk that referenda in other countries could lead to further exits from the union.

Instead, she believes equity exposure should be concentrated in Asia-Pacific, especially in the region’s emerging markets.

“We have overweight positions in India, Indonesia and Philippines equities because they are largely domestic-driven economies that are less exposed than others to external problems, such as sluggish global trade activity and Brexit-induced uncertainty in Europe.”

But Hong Kong and South Korea get a neutral and Taiwan an underweight due to the importance of global trade to their economies, Wan added.

Part of the Mark Allen Group.