Quarterly Asset Allocation - Q4 2020

4Q Investment Outlook: Still Bullish on Equities and Bonds

 

Q: Principal Asset Management (Asia) Investment Management Team

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

 

Q: Global economy bounced back strongly in 3Q. How will the continuous COVID-19 development affect the global economy in 4Q?

A: The COVID-19 pandemic has been recurrent in Europe and the US. But we still believe that local governments have little chance to reimplement the large-scale prevention measures. The chance of a second dip in the economy is low. However, it should be noted that the global economy has already improved significantly in the third quarter. Growth may slow down in the fourth quarter.

Q: How should equity assets be allocated in 4Q?

A: For the fourth quarter, we are still slightly bullish on equity. Among them, we are bullish on the United States and China. Asia is slightly bullish, and Japan is neutral. Hong Kong is slightly bearish, and Europe is bearish.

Q: With the US presidential election in the offing, should we reduce the holdings in U.S. stocks?

A: In addition to the development of COVID-19, there are still risk factors ahead. For instance, the US election in November. People often ask, which political party dominates is better for US stocks? Before and after the election, the investment market may experience short-term fluctuations. No matter which party comes into power, the end of the election will eliminate uncertainties for the market and turn everyone back to the fundamentals. However, it should be noted that if the Democratic presidential candidate Biden wins, his proposed tax increase may damage the profitability of the technology companies and therefore may adversely affect the performance of the technology stocks. On the other hand, the increase in potential infrastructure investment may benefit related sectors.

On the whole, the U.S. economy is improving. The monetary policy remains highly accommodative and corporate profits continue to improve. These may continue to benefit the performance of U.S. stocks.

Q: Why are we bullish on China but slightly bearish on Hong Kong?

A: As for China, it will benefit from the strong recovery of corporate earnings, continued fiscal and monetary policy support, and relatively reasonable valuations. Although Sino-US relations are undoubtedly still tense, it may not hinder the continued steady improvement of the economy for the time being.

The turnover of Hong Kong stocks has shrunk for months and it was one of the global major markets that recorded the worst performance in the third quarter. The pandemic in Hong Kong has been recurrent. Although the government has introduced large-scale fiscal measures, it will still take a long time for the local economy to return to the level before the social movement and outburst of pandemic. Profit prospects of local companies are still not optimistic.

Q: Market volatility is expected to increase. How should bond assets be allocated?

A: As interest rates continue to stay low, the return on holding cash is relatively low. In the fourth quarter, global central banks will remain accommodative. That may stimulate the continued flow of funds to corporate bonds. We are generally optimistic about the prospects of corporate bonds, and particularly prefer Asian corporates. As for sovereigns, as interest rates have little room for further downside and valuations are high, we are slightly bearish.

 

Crystal Chan
Senior Investment Specialist
Principal Asset Management (Asia)

 

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