After a strong performance so far in 2019, compelling growth opportunities across the Asian asset complex look to be increasingly harder to come by as we move into the second half of the year.
Investors will require a combination of fine-tuned asset allocations to squeeze out a decent return. Below are three options for investors looking to take advantage of the Asia growth story across the capital structure.
Asia equities and high yield
The relative value between equities and high-yield bonds is starting to turn, with stocks now looking increasingly attractive.
The recent announcement of a truce in the US-China trade war after the G20 Summit may prove to be the catalyst needed to trigger momentum towards equities.
However, the uncertain US economy and what that means for Federal Reserve rate cuts may keep confidence in check. Less aggressive investors may instead look to defensive high-dividend stocks.
The dispersion in dividend yields currently enables investors to augment their dividend yield by 40 to 50 basis points above the market average, while still running a well-diversified portfolio with a low equity beta.
A high average free cash flow yield and low payout ratio should also mean a more stable income profile for Asian stocks versus the rest of the world.
Income focused investors may find it particularly hard to budge from the highest yielding asset class across fixed income.
Asia high-yield bond valuations still look attractively valued after delivering over 12 per cent returns year-to-date, the technical drivers of this good performance remain, and corporate balance sheets are in reasonable shape.
The technical picture has improved because of the Chinese authorities’ targeted stimulus measures.
Chinese issuers represent around 60 per cent of the Asian high-yield market and improved credit conditions for privately owned enterprises is a major factor behind the stabilisation in onshore and offshore credit spreads.
The signs continue to be encouraging; bank lending to companies and bond financing conditions have improved, and there has also been some minor improvement in business survey data.
Chinese equities looking attractive
Investors with more risk appetite may now see an opportunity to add to Chinese equities, especially those investors that are currently underweight.
We have already seen a robust rebound following the G20, but equities have still not retraced May’s losses, and are still some way off the MSCI China index’s 2018 highs.
We believe first order effects from the current set of tariffs on listed offshore companies is likely to be small because only around 1 per cent of their revenues come directly from the US, and most of the damage to earnings growth expectations came from the impact of tighter credit conditions on growth, which has now reversed.
Earnings revisions have troughed and are starting to improve as a result.
Rotating within emerging markets debt
Emerging market debt has rallied hard this year, but hard currency (denominated) bonds have delivered almost twice the return of local currency bonds as the US dollar has remained surprisingly strong.