Kevin Anderson, State Street Global Advisors
Against a bright macroeconomic backdrop, coupled with constructive quantitative forecasts, SSGA has a continued preference for growth assets across equities, credit and commodities.
This is particularly important as investors prepare for inflation being temporarily higher over the rest of 2021.
“Multi-asset portfolios benefit in an inflationary environment, with the ability to adjust between equity and bond portfolios as we navigate different stages of the inflationary cycle,” said Kevin Anderson, head of investments for SSGA in Asia Pacific, in an interview with FSA.
Recent changes in the firm’s tactical asset allocation weights reflect its baseline assumption of economic recovery while expressing its regional outlook and asset class views.
From a regional equity perspective, it prefers the US but holds a diversified position and recently extended its overweight to Europe. SSGA has also further underweighted Pacific equities as deteriorating sentiment scores and undesirable price momentum weigh on its forecast for the region.
Gold, meanwhile, is supported by low real rates and a negative short-term view of the US dollar.
In terms of commodities overall, these are supported by the firm’s quantitative framework as improvements in mobility data, economic reopening and a weaker US dollar provide tailwinds to global demand.
Pinpointing pockets of yield
SSGA also continues to see opportunities in corporate credit, as robust growth bolsters credit fundamentals and investors forego low/negative yielding sovereign debt in favour of corporate bonds.
One of the specific sources of yield the firm expects investors to focus on will come from a reversal of the significant number of fallen angels in 2020 as the recovery gathers pace.
As it does, those same fallen angels will become rising stars, said Anderson. “Around $280bn of BB-rated debt will likely become investment grade by the end of 2022. This will more than offset what we saw in 2020 with the downgrades,” he added.
Another appealing option for investors seeking yield is the local currency emerging markets (EM) debt space.
“We favour local currency over hard currency, and in EM debt, parts of the hard currency universe are beginning to look a little expensive,” explained Anderson.
Compelling in China
From an equities standpoint, investors should pursue opportunities in EM, given it has the highest earnings-growth expectations in the world, according to SSGA.
Within this universe, China offers advantages that justify particular consideration. This is based on the market’s unique dynamics, as well as it exhibiting lower levels of correlation. “For longer term investors, given valuations, we are at an interesting entry point for Chinese equities, separate to EM,” Anderson added.
In fact, China should remain a long-term play for most investors, he said. “We look for quality, sustainable growth at a reasonable price. It is still a stock-pickers market.”
Based on the firm’s active focus on China, some of its long-term preferences are in the consumer staples, consumer discretionary, healthcare and communications sectors.
Being risk aware
Amid the optimism, investors need to also be careful about markets becoming complacent, which in turn would leave them vulnerable to shocks.
For example, the potential for sustained higher inflation poses a key risk, as does any move toward tightened monetary policy.
In China, in particular, regulation of the technology sector and e-commerce, along with credit management, present risks for investors to be aware of.
Helpful approaches to manage the various risks they face, however, include low-volatility equities, options overlays, Chinese government bonds and real-asset strategies, added Anderson.
