Entering into the second half of 2013, Allianz Global Investors (AllianzGI) regards a moderate global recovery with low inflationary pressures to be a sweet spot for risk assets, especially when coupled with loose monetary policies.
North Asia is better positioned to benefit from an improving US economy. Despite the recent volatility, Chinese and Hong Kong equities are still trading at low valuations in the region.
“Despite the recent bond sell-offs sparked by a possible retreat from QE, a rise in real bond yields in tandem with falling inflation expectations is sending a positive signal to the global economy," says Raymond Chan, AllianzGI’s Chief Investment Officer, Asia Pacific. "The US economy sees firmer growth prospects with the negative fiscal impulse fading. The euro zone is still weak, but we believe the worst is over as the economies are beginning to slowly stabilise.”
Asia will be subject to a variety of capital flow-related headwinds over the coming quarters.
The North Asian economies are better positioned to benefit from a resurgence of US economic activities. South-east Asian economies will continue to adjust their external positions through weakening exchange rates.
In Japan, Abenomics is beginning to bear fruit with the aggressive monetary reflation having a positive impact on the economy. However, there are concerns that the announced reform measures were far from adequate.
“The current market correction in Japan is temporary and we expect it to regain momentum now that Abe’s Liberal Democratic Party has won the upper house elections," comments Chan.
Chan notes that as long as the yen remains weak against the US dollar, companies are likely to post record earnings this year. Success in Japan now rests on the introduction and implementation of reform measures, but enacting tangible, credible reforms will not be easy.”
Key themes for China/Hong Kong
AllianzGI believes that the Chinese economy will slow down but will avoid a hard landing. The country is entering a new era and we believe the new government is serious about reforms.
The government is undertaking a series of reforms with the aim to drive long-term structural change instead of a short-term economic growth. This should reduce the risk of a boom bust going forward. The nature and pace of the reforms will be key economic catalysts.
“Chinese and Hong Kong equities are continuing to trade at cheap valuations," notes Chan. "In particular, H-shares have the lowest valuations compared with its Asian peers. The earnings momentum remains low and has yet to rebound, but we expect long-term buying potentials in companies with strong fundamentals."
Chan adds that in terms of key investment themes in the Hong Kong and China markets, investors should keep an eye on green policies, as well as tourism and gaming.
"A rapidly expanding middle class in China also points to a growth in consumption - one way to benefit from the consumption story is to play the tourism and gaming theme. Regional hotels and selected consumer companies benefit from rising Chinese tourists spending money abroad,” Chan continues.
Don't change portfolios based on short-term volatility
On the local MPF market, Elvin Yu, Head of Institutional Business, Greater China and South-east Asia, advises MPF members not to change their MPF portfolio simply because of short-term market developments or volatility.
He explains, “MPF members should focus on their risk tolerance level, investment horizon and life cycle. Given that the prolonged interest rate environment may come to an end in the next year or two, there may be higher interest rate risks associated with bonds.”
Commenting on the Legislative Council’s latest amendment to increase the minimum and maximum relevant income level for MPF contributions, Yu says, “It is a good initiative which means more savings for long-term retirement planning. MPF members could also consider saving more via voluntary contributions.”