As investors grapple with the mix of inflation, recession and geopolitics as key risks today, they need to also be focused on the possibility of a wide range of outcomes amid a parallel boost from economies reopening post-Covid and China’s stimulus measures.
This requires investment playbooks to challenge the status quo and foster agility to capitalise on market openings.
At the same time, the potential peak in inflation implies that the traditional 60/40 portfolio strategy could resume its strong and consistent performance over the coming decades.
“Broad diversification and liquidity are key considerations in a slowing growth and rising inflationary environment,” said Bill Maldonado, chief investment officer for Eastspring, in line with the release of the asset manager’s mid-year outlook for 2022.
Titled “Inflation. Recession. Geopolitics. Do investors need a different playbook?”, it explained from an asset allocation perspective that, during times of high market volatility and high inflation, real assets, such as gold, are attractive havens.
Steering through volatility
Eastspring believes low volatility equity strategies can help investors ride through choppy markets. “Low volatility stocks fall less during market declines, minimising the risk that investors exit the market at the wrong time,” said Maldonado.
Income from equities can also help add resilience to portfolios, he added.
“Dividend paying companies are a buffer during volatile markets, providing a more consistent return of capital given the strong cash-flow generating abilities of such companies.”
Within fixed income, the firm sees US high yield credits as potentially benefitting later in the year, as long as the US economic outlook remains supportive.
It also finds value in Asian bonds. “Most 10-year local currency Asian bond yields are close to their five-year highs and have crossed peaks seen during the 2018 Fed hiking cycle,” said Maldonado.
“Meanwhile, the steepness across most Asian yield curves relative to their historical averages suggests that it makes sense for investors to add longer duration bonds.”
As risk sentiment improves, returns might then be enhanced by the higher yields and more attractive credit spreads.
Impact of ESG
Investors must also bear in mind the ever-important role of decarbonisation in driving asset allocation decisions – and, in particular, should be aware of data quality and gaps.
“An over emphasis on environmental factors can lead to unintended consequences of avoiding companies perceived to be bad for the environment,” warned Maldonado.
Further, there is no single approach to ESG or sustainable investing, and investors should not avoid investing in a company simply because it has a poor risk profile, he explained.
At the same time, a large part of the significant funding required to combat the climate challenges confronting Asia will come from the region’s bond markets, in the form of sustainable and green issuances.
Saying alert
Inevitably, however, investors must broadly remain vigilant amid today’s unpredictable environment, noted the Eastspring report,
Geopolitical tensions remain an ongoing source of market volatility. Equally, global growth could be impacted by supply chain disruptions, higher inflation and rate hikes.
“Policy error continues to be a key risk, be it rate hikes or China’s zero-Covid strategy,” added Maldonado. “While policymakers in the past may have dealt with these risks separately, it is the confluence of these risks which is unprecedented.”
