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Markets are concerned the disinflation narrative might be losing steam following hot inflation prints in the US and Europe, which sent government bond yields higher across the board. This week, Federal Reserve Chair Jerome Powell’s testimony and the US job report will likely reveal where the disinflation story goes next. We believe it’s unlikely that central banks will increase the magnitude of interest rates hikes. This should limit the upside in bond yields, making high-quality bonds attractive assets to hold in 2023.
European sovereign yields already rose to levels not seen since 2010. The 10-year US Treasury yield topped 4% for the first time since November, while the 2-year yield bypassed November highs.
Lastly, there’ve been more evidence that the Chinese economy is rebounding. Beijing remains committed to support its economy, although its rather conservative growth target (5%) reduces the need for outsized stimulus. Last week, Asia-Pacific equities outperformed that of emerging markets. We believe that Asia-Pacific will be in front seat to benefit from China’s reopening.
PORTFOLIOS AT A GLANCE
This week we are making some changes on the equity and fixed income front, as well as reducing some of our active fund exposures.
As mentioned in the section above, the data suggests the outlook for the Chinese economy is good and we believe the full effects the reopening-driven growth are yet to be priced into equity markets. Therefore, we have repositioned our Emerging Market (EM) equities exposure to Asia-Pacific (Asian, Pacific and Japan) equities. This means we gain a more direct exposure to the benefits of Chinese economic growth, while also getting a more diversified exposure to the reopening theme through the increased allocation to developed markets such as Japan.
We believe Asia-Pacific equities also offer more attractive valuations as China’s reopening coupled with continued supportive policy action has led to positive momentum in their prices and earnings expectations.
Sticking with the EM theme, we first introduced EM bonds in May 2020; we then increased them in 2021 amidst a low yielding environment - with mixed success. We have now decided to reallocate our EM sovereign exposure to high-quality government bonds as the difference in yields are no longer as attractive given the recent (and expected further) rate hikes seen in the West.
This allows us to reduce the sensitivity of the bond allocation to interest rate changes while increasing its quality. With these changes, the overall risk levels in portfolios have reduced slightly as our equity exposure is also still biased to large quality companies.
Past performance is not a reliable indicator of future returns.
TACTICAL ASSET ALLOCATION
CASH & GOLD
Source: In-house research as at 06 March 2023.
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