Tai Hui, JP Morgan Asset Management
The liquidity tightness, especially in the property sector, has stirred up the Chinese credit and equity markets. Yet, although prices have fallen, Tai Hui, Asia chief market strategist at JP Morgan Asset Management, believes this is not yet a good entry point for raising exposure to the property or financial sectors.
“Investors should be patient and wait for the whole event to play out, because there could be still some unknowns. We don’t have a complete picture of how policymakers will react,” said Hui.
“So, I would rather forego some potential upside than sit through a lot of volatility. If I’m wrong and the market or these companies jump by 10-20%, so be it. I still don’t feel confident enough to tell people: look, we should go for it now.”
However, Hui believes systematic risk remains manageable as the central bank has room to step up monetary easing to deal with potential liquidity squeezes. Beijing might also relax property price restrictions for the market to regain confidence as an emergency measure, but that may cost the credibility of the government.
Nonetheless, with momentum in the US and Europe having peaked, Hui believes that Asia equities, especially those in Japan deserve more attention for the rest of the year and 2022.
For Japan equities, Hui recommends the technology sector, such as semi-conductors companies, or niche companies that have a strong global brand, such as bicycle makers.
He also expects Southeast Asia equities to outperform when vaccination rates increase and borders reopen.
In terms of sectors, Hui believes cyclicals such as financials, industrials, energy and materials would be tactical sectors to focus on for the next six- to 12-months, as they are likely to outperform the index with rising yields.
Yet, technology and healthcare sectors should be the core in a portfolio, as they have been delivering positive returns over the last one-to-two decades, and are expected to continue to do well for at least the next three-to-five years, according to Hui.
Global bond markets, on the other hand, are facing upside risks to government bond yields and lower relative valuations as economic activity improves.
Hui thinks the main returns from fixed income will come from coupon and yield rather than price appreciation, which makes “emerging market and corporate high yield bonds the only two places to generate good returns”.