Economic trends

Time for equity investors to accept lower returns?

Market fluctuations will continue, making less risky investment strategies more compelling

Investors are understandably cautious these days. With global equity markets volatile throughout 2016, the investment environment remains uncertain.

Although equity markets could post positive returns before the year is out, we believe this will be accompanied by greater and more frequent market fluctuations.

The uncertainty makes certain investment strategies such as multi-asset income investments attractive as they are less sensitive to fluctuations. Such strategies may come with modest returns, but for income-orientated investors we think this is a trade-off worth making in the current environment.

India and Indonesia are our two most preferred markets in Asia

Generally, we are cautiously positive on Asia excluding Japan, but our view could change if the US dollar’s strength continues. While India and Indonesia are our two most preferred markets in Asia, we are becoming more positive toward China, as recent developments have the potential to reduce equity market risk in the region. For instance, China’s banks, which have been a perennial concern for investors, have started to address their non-performing loan problems in recent quarters.

Meanwhile, the Shenzhen-Hong Kong Stock Connect will give international investors access to compelling investments such as mainland-listed high-growth technology companies for the first time.

In China, we currently favour new economy stocks, including those in the internet and services industry groups. The former is benefiting from the growth in the e-commerce and the latter group gives investors direct exposure to the rising middle class and urbanisation trend.

Trump victory aftermath

We believe the US economy is in a late business-cycle environment, which tends to feature declining margins. While margins have been under pressure for some time, they are positively correlated with inflation. As inflation expectations have recently started to increase, this could provide an unexpected late cycle boost to corporate margins in the US.

US corporate earnings are forecast to recover in 2017, driven by an improvement in the energy sector, but if President elect Trump follows through on his pre-election promise of cutting corporate taxes and boosting infrastructure investment, this could boost corporate earnings too.

Opportunities from a weaker pound

In the UK, we are positive on stocks that are benefiting from the weakening British pound, particularly those with significant amount of earnings derived outside the UK, including blue-chip names with stable assets and solid dividend yields. Meanwhile, while pound remains weak, it is undervalued, and current levels could represent a good opportunity for long-term investors.

On the radar

Looking ahead, upcoming risks to keep an eye on include the pace of interest rate increases by the US Federal Reserve (Fed), and elections in Europe which could lead to the rise of populist parties. While the market is anticipating higher interest rates, spikes in volatility around the the Fed’s decision cannot be ruled out.

One of our preferred equity themes, especially in the US, is domestic consumption. It is more defensive relative to its peer – global consumption – which tends to be more cyclical. This preference complements our stance towards global equities and represents an opportunity for investors to benefit from an investment theme which could last for years.

More broadly, multi-asset income strategies offer income-orientated investors modest returns with lower risk in the uncertain environment. However, investors willing to take on more risk for higher potential returns could consider equities in the US and Asia ex-Japan, especially India and Indonesia, and the ‘domestic consumption’ theme.

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