Costs and competition to drive Asian consolidation
What investments are you expecting to be popular with your Asia clients in 2014?
Asian private banking roundtable: Participants
TSS, DBS Bank
We call 2014 the Year of the Taper
, as we expect that financial markets will likely be defined by the US Federal Reserve’s decision to taper its quantitative easing programme. We expect there to be much interest in global, in particular developed markets equities, as the continuing economic rebound translates into corporate earnings growth.
Hedging bond portfolios, China
, US, Europe & Japan.
Fixed income has had a good few years, but with the threat of slightly higher global interest rates into next year, we are already seeing a move towards equities
. But with continuing uncertainty we feel clients will be selective across markets and sectors. We believe the hunt for yield will continue, and there might be further interest in alternatives to match a shifting risk appetite and higher volatility.
We might continue to see a preference tilted slightly more towards equity and credit risks than core bonds (government and high-quality investment-grade bonds) in a rising rate environment; developed market equity will remain popular although emerging markets
might be diverged and might increasingly become interesting towards mid-year and beyond; more manager selection (manager alpha) across equities than passive index-based investment; carry trades might possibly dominate fixed income as short-term interest rates are very likely to remain low versus corporate bond yields although controlling duration is important; higher-yielding bonds with duration of five years or less and equity-like hybrids would most likely continue to resonate well with clients balancing duration risk and higher carry.
LJ, China Merchants Bank
For China steady investments such as fixed-income and insurance products will maintain their appeal over the next two years, but high-net-worth individuals have mixed views about the securities market. Among all investments, HNW individuals are most willing to increase their allocation in fixed-income products. Based on our survey results, investments in trusts, bank wealth management products and bonds will increase. As demand for wealth preservation intensifies, demand for insurance is also rising. Despite their having a lower share in total asset allocation, investors are still keeping an eye on other domestic investments, which offer diversity and, in some cases, high expected returns (eg, private equity). The uncertain outlook for the stock market
has created a polarized view of investments in stocks and funds, and the ratio of overweight to underweight is about the same. In the real estate market, HNW individuals have taken a "hold and see" attitude because of tightened regulations and increased market uncertainty.
MC, BNP Paribas
For 2014 two main themes will be at the centre of our investment strategy. For defensive investors, the quest for yield is still the main challenges as we forecast gradual and slow increase of interest rates. We will be very selective in bonds and will focus on high-yield and convertible bonds and European sub debt
. For more risk-minded investors we will continue to play the big rotation, helping to move out of expensive bonds into equities.
Given our expectations for developed markets to lead the global recovery into 2014 and optimism on the earnings outlook based on moderately higher global growth expectations, Asian investors should continue to diversify away from their home bias into select investment opportunities found in the developed markets.
Although equity and US high-yield credit – two asset classes we are overweight in – are no longer cheap, they are not yet at levels where mean reversion is likely to detract from returns. We believe these risk assets are far more attractive than cash and government bonds, whose real returns are likely to be negative.
In the equity portion of an Asian investor’s portfolio, we advocate an overweight exposure in both US and eurozone equities, while keeping neutral on emerging market equities including Asia. Within Asia, we believe the eventual tapering of quantitative easing should benefit north Asia over south Asia – China and Korea are our preferred markets.
In the bond portion of an Asian investor’s portfolio, we continue to advocate an overweight in investment-grade corporate bonds and US high-yield credit over high-grade or government bonds.
In the area of currencies, investors should always hedge currency exposure as a rule. In the next six months, we believe a short position on the Japanese yen against the US dollar offers a better risk-reward trade-off than being overweight in Japanese equities. On the Australian dollar, a favourite among Asian investors, we continue to believe it remains overvalued and encourage investors to make use of rebounds to lighten their exposure.
FdF, Credit Suisse
Fixed income has done extremely well the last two years and it would be difficult to see those types of returns still unless investors are more willing to take risk. We see increasing interest from clients to explore alternative investment strategies as a way to actively hedge some of the lateral market movements we are going to see. In equities a lot of investors are looking to Europe this year. We are very bullish on China
. Some clients have invested in Japan early with currency hedged, and have seen very interesting returns. The key themes we see are: fixed income in a world of rising yield: European recovery on stocks; and emerging markets more skewed towards China. The other big thing is the number of IPOs. Equity capital market activity is going to continue to be strong into Q1 and on the back of that clients will be active.