This week: Diversify your portfolio across China and the rest of the world: Hang Seng Bank; Commodities will be the biggest winner of China’s reopening: UBS; Inflation about to collapse: Julius Baer
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Why clients need to diversify: Hang Seng Bank
Investors should not place all of their bets on China’s re-opening and ensure they are diversified across markets, according to Belle Liang, CIO, IWS (Investment and Wealth Solutions) at Hang Seng Bank, despite valuations in areas such as H-shares being very attractive.
The “Hong Kong stock market is very well established. But we believe for the core portfolio, clients cannot only hold a single market alone, and they should also consider diversifying to other parts of the world”, CIO of the Hong Kong-based bank told Asian Private Banker.
She explained that Hang Seng private banking clients have huge exposure to the Hong Kong stock market as a core holding for clients’ portfolios – a trend that has developed over generations.
“We always talk to our clients about how they should gradually increase exposure to other key markets such as US, Europe, and other parts of Asia.” She highlighted that over-concentrating on Chinese equities has high beta risks. “Building a portfolio that is diversified and has a lower beta risk is our goal for clients.”
Don’t ignore the US
The US market has been underperforming the Chinese stock market of late, with the S&P500 still struggling to recover from last year’s market turmoil. Meanwhile, Hong Kong’s Hang Seng Index hit its highest in six months on Monday. Still, Liang believes that the US market is a good play.
“When clients invest in China, they often worry about the policy risk,” Liang argued. “But when investing in the US, we would often focus on the companies itself based on the fundamentals, the RoE (return on equity), the dividend forecast, and the calculation of future cash flows.”
Hang Seng currently favours the US healthcare sector due to its reasonable valuations, strong cash yield, and demand recovery.
Hang Seng Bank in 2023 also believes that fixed income will offer attractive yield.
“We really feel the first quarter is a great opportunity for clients to reconsider the yield strategy for their portfolios because now US or Asia investment grade credit could easily offer up to 6% for three years tenure,” Liang explained.
Asia is the region that she likes in 2023. “The US dollar strengthened last year, which made Asia currencies underperform. But this year, we expect the US dollar to become weaker, regardless of the Fed policy or the economic cycle. And this is where we start to gain confidence on the inflows in terms of Asia fixed income and Asia equities.”
With such yield opportunities, she said the bank recommends its clients reposition themselves to further build their fixed-income portfolios.
Take time to cherry pick
For equities, she believes there are a lot of opportunities for stock picking and finding companies that can deal with margin pressures and recession risk.”We believe investors can take time to cherry pick a more resilient business model and business.”
Chinese tech giants have rallied recently, with Alibaba up almost 30% in the past month. However, Hang Seng Private Bank’s clients are not rushing back into these names.”Our clients are very focused on yield enhancement, and they would have invested in structured notes linked to the tech stocks, instead of really trading in and out now.”
“But I think we will continue to see good performance from leading Chinese tech giants, due to gradual ease of government policy tightening, trough valuations, and hope for consumption growth return post COVID-19.”
Commodities to win from China re-opening: UBS GWM
UBS Global Wealth Management (GWM) thinks that crude oil is likely to emerge as the biggest winner from China’s reopening.
“The country is the world’s second-largest consumer, and oil demand contracted in 2022. In 2023, however, we expect two-thirds of oil demand growth to come from emerging Asia — and a faster reopening could see that share rise even higher,” the Swiss giant said in its latest CIO research.
Among oil products, jet fuel demand is likely to see the fastest growth amid a recovery in Chinese international travel, the bank noted.
While inbound travel is likely to recover first, UBS said international flights also increased in December. Pent-up savings mean outbound tourism should also pick up dramatically.
“This supports a rise in Brent above US$100/bbl over the coming months, in our view. We advise risk-taking investors add long positions in longer-dated Brent contracts or sell downside price risks. We also continue to favor energy equities globally as the sector’s valuations remain heavily discounted to their ten-year average.”
Inflation about to “collapse”: Julius Baer
Julius Baer expects that inflation could soon fall dramatically, meaning that the US Federal Reserve will likely only raise interest rates one more time – if at all – in its current cycle.
“It is only a matter of time before inflation starts to roll over, and there are lead indicators that strongly suggest inflation is about to collapse,” Mark Matthews, head of research, Asia Pacific, Julius Baer, said in a recent note.
Julius Baer believes the Fed is likely to raise interest rates only one more time. “And this is not too much of a speculative assumption, as property prices are softening, commodity prices are softening, and if we just assume US CPI rises 0.1% month on month, CPI inflation will get to just 2.5% in May, which is around where the Fed wants to see it,” Matthews explained.
“The argument for inflation staying with us for years and years is becoming increasingly desperate, and increasingly hard to make.”