Quarterly Asset Allocation - Q4 2021

4Q Investment Outlook: Equity assets in the developed markets may continue to outperform as tapering may have limited impact overall


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 facing?

A: In the fourth quarter, markets will be eyeing the impact of tapering by the Federal Reserve. Although the U.S. economy is seen as having decelerating growth, the overall growth rate is still satisfactory. Markets have also arrived at the consensus that tapering will commence in the coming few months. Therefore, as long as the economic momentum remains unchanged, the impact of tapering on the economy and asset prices may be relatively limited.

With reference to the FED’s tapering in 2013, both equities and bonds had recorded positive cumulative returns in one year. Global equity had experienced a temporary retreat, but the return still reached about 5% after a year. In 2022, the balance sheets of major central banks in developed markets may remain expansionary. The overall global financial conditions are expected to still be accommodative.

With global vaccination rates steadily increasing and the threat of the Delta variant beginning to be contained, the global seven-day average of new cases is gradually coming down, favoring the reopening of countries that were seriously affected, such as the U.S. and China. However, the market should not ignore the risk of a resurgence of the pandemic, a continuously elevated inflation that may change the expectations on FED's rate hike decision and the contagious industry regulations triggering systematic risks in China.

Q:How should equity assets be allocated?

A: Developed markets have clearly outperformed emerging markets over the past quarter and we believe the trend may sustain. In the new quarter, we continue to like equities. Among them, we are most optimistic about Europe due to the solid pace of economic growth, ongoing accommodative monetary policy, and the prospect of fiscal stimulus.

We are slightly optimistic about the U.S. The Federal Reserve is more likely to not raise rates until late 2022 even though tapering is on its way. The economic and corporate earnings growth are still expected to be relatively impressive.

We are also slightly optimistic about Japan. Although the local economy is relatively weak, the new wave of the pandemic has receded from the peak, which may be favorable to its economic reopening.

Asia is neutral. Some countries are expected to reach herd immunity by the end of the year, which may help their economies to catch up with the developed markets. However, more countries may begin to tighten monetary policies to curb rising prices.

We are slightly bearish on Hong Kong stocks and neutral on A-shares. With the intensifying downward pressure of the Chinese economy, both fiscal and monetary policies are expected to be more supportive. However, there is a chance that the regulatory restraints in the Mainland may continue to impact the performance of the Hong Kong stock market.

Q:How will the adjustments in monetary policies impact bond investments?

A:For bonds, we maintain our neutral view overall. It may be difficult for the U.S. 10-year treasury yield to rebound significantly due to slower economic growth and the belief that inflation expectations may have peaked. Therefore, we have adjusted upwards our views towards sovereigns to neutral.

In view of slowing economic growth, capital may prefer relatively high-quality corporate bonds and therefore investment-grade bonds have been adjusted upwards to slightly optimistic. High-yields are adjusted downwards to neutral.

Crystal Chan

Crystal Chan
Senior Investment Specialist
Principal Asset Management (Asia)

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