Quarterly Asset Allocation - Q3 2021

3Q Investment Outlook: Equity assets are still supported by fundamentals despite a potential rise in volatility

 

Q: Principal Asset Management (Asia) Investment Management Team

A: Crystal Chan, Senior Investment Specialist of Principal Asset Management (Asia)

 

Q:What are the risk factors that the investment market is going to face in the third quarter?

A: IIn the third quarter, volatility faced by the investment market may increase. Global inflationary pressures are gradually heating up. As the economy continues to reopen and demand increases, inflation may be higher than originally expected or even last longer if the speed of supply fails to catch up, making the easing policies of global central banks turn around earlier.

Based on our forward-looking indicators, inflation in the United States and the world may remain high in the third quarter. But there is a chance that it will gradually decline in the fourth quarter. For the time being, inflation is still dominated by transitory factors.

From this quarter onwards, the Federal Reserve has a chance to commence the discussion on reducing debt purchases, and officially take action before the end of the year or early next year. However, the initial trim is expected to be relatively small. During 2022, FED's balance sheet is expected to still be expanding. Monetary policy remains accommodative overall.

Q:How would equity fundamentals impact the allocation of equity assets?

A: Although the economic growth rate of some developed markets may have peaked in the second quarter, with the support of the accommodative policies, the economic growth trend remains unchanged. Moreover, with the continued upward adjustment of earnings growth, the stock market valuations are more attractive than that at the beginning of the year. Coupled with steady inflows since the end of last year, we believe that equity may still outperform fixed income in the third quarter. But due to the uncertain factors that may drive market volatility, we have adjusted downwards our view on the stock market, but still slightly optimistic.

Among them, we are slightly optimistic about the United States, Europe and Asia, while our views on Japan, China and Hong Kong are neutral. Other EMs are slightly bearish.

Q:How should bond assets be allocated?

A: Based on the belief that the rise in inflation is transitory, coupled with risk-averse factors, the U.S. 10-year Treasury yield may not rise significantly this quarter. Therefore, we have adjusted upwards our view towards bonds to neutral overall.

AAmong them, we are slightly bearish about sovereigns, neutral on investment-grades and slightly optimistic about high-yields, which may benefit from ample liquidity and spread advantage.

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Crystal Chan
Senior Investment Specialist
Principal Asset Management (Asia)

 

 

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