Keiko Kondo, Schroders
Both equity and bond prices have recorded significant falls since the beginning of the year, and Schroders believes investors should search for returns through other asset classes, such as commodities and alternatives.
Speaking at a media briefing which FSA attended, the UK asset manager believes the global economy has entered a slowdown phase with increasing risk of recession.
Owing to potential negativities over the near-term outlook, gold and broader commodities can be viable means to diversify portfolios, said Keiko Kondo, head of multi-asset investments for the firm in Asia, speaking at the event.
“Commodities to us are currently the best asset class as a hedge for inflation,” said Kondo.
“Although commodities prices have gone up a lot and are becoming more volatile from a valuation viewpoint, the oil inventory level in 2022 is still much lower than typical historical level, and therefore we are still bullish on commodities assets.”
Other than oil, gold is another asset class which Kondo prefers. “Gold and bonds tend to do well in the early stage of tightening cycles. Given the difficulty to aggressively buy bonds, gold offers a better way to hedge for recession risks.”
Schroders remains conservative on equities for the second half of the year, particularly on Asia secular growth sectors and value-oriented global companies such as semiconductors, sustainable food and water and smart manufacturing.
While most economies around the world are worried about historically high inflation levels, Japan is one of the few countries that welcome inflation.
The market is also attractively valued when compared with other developed markets, especially with uncertainty around US earnings calls, Kondo noted.
In terms of government support, Japan also stands out as the market with explicit monetary support while central banks elsewhere are turning hawkish, she added.
Although Covid is still causing disruption in China, Schroders sees new rounds of indicators showing that the market is beginning to bottom out.
“With our concerns about rate increases dominating our views in other markets, recent data indicate the likelihood of looser monetary policy in China, and this together with attractive valuations present us with a relative opportunity versus broad markets,” said Kondo.
“At the end of last year, we anticipated the interest rate increase, but we did not take into account the Russia-Ukraine conflict, which happened at the beginning of this year,” explained Kondo.
“With the broad market dominated by growth stocks, the financial sector still has been doing a bit better than the broad market year-to-date. However, other names underperforming doesn’t mean that banks are generating attractive returns.”
With a flattening curve, Kondo still prefers value stocks versus growth names, but is now more neutral on the financial sector.