Greater China equities moved sideways in June as investors awaited key messages from the Third Plenum. Macroeconomic data remained weak, and there is still no significant improvement in the property market, says Kelly Chung, chief investment officer of multi-assets at Hong Kong-based Value Partners Group.
Meanwhile, the rest of Asia was mixed. On the one hand, Southeast Asia markets continue to be pressured by the uncertainties in the US election and the strength of the US dollar. On the other hand, the tech-heavy markets of Taiwan and Korea continue to ride on the robust demand for artificial intelligence-related technologies and applications.
China/Hong Kong equities
With US inflation data continuing its downward trend, the market expects the Fed to cut rates twice this year. Although the encouraging inflation data has led the market to continue breaking an all-time high, volatility will likely increase going into the earnings season due to the very high expectations over earnings and rising uncertainties over the coming election. The market is pricing in a Trump-win as a base case scenario, but uncertainties are also rising over the possibility of a change in the Democratic candidate.
Within China/Hong Kong equities, the market moved sideways in June, as there is still no follow-through from the policy announcements in May. In addition, most investors are moving to the sidelines, awaiting messages from the Third Plenum that will take place on 15 July. At the same time, economic data remains weak: the manufacturing and services PMIs deteriorated, while consumption dragged. There is also still no significant improvement in the property market.”
China A-Shares
Sentiment in A-shares remained weak amid the declining long-term bond yields, depreciating RMB, and deteriorating economic data. Speculations of tax reform, including an increase in consumption tax (expected to be announced in the Third Plenum), added to the pressure of the already weak demand.
Asia ex-Japan equities
Asian equity markets have performed well along with the US stock market, although performances were mixed across markets. Volatility in Asian equities is also likely, given the rising uncertainties in the US election. Asian equities, especially Southeast Asia, are also expected to be pressured by the market’s pricing in a Trump-win base case scenario and the continued strength of the US dollar. On the positive side, a clearer Fed rate cut path also allows Southeast Asian countries more room to start cutting rates.
Given the increasing expectations of Trump winning, expectations of a harsher attitude towards China from the US are also rising. Hence, flows are returning to Japan and India away from China. Meanwhile, the Taiwan and Korean markets have performed strongly, thanks to the ongoing positive sentiment over artificial intelligence (AI).
Emerging market ex-Asia equities
The upcoming US election may have significant implications for different emerging markets in Latin America and Eastern Europe. The market is pricing in a Trump win as a base case. The strong US dollar and the potential higher tariffs will likely pressure emerging markets. The heightened geopolitical tensions in the Middle East remain a risk as well, although the higher oil prices will benefit some emerging markets.
Japanese equities
The Japanese yen has moved to a 38-year low versus the US dollar, and traders are still betting for a weaker yen. Although the weak currency is positive for exporters and tourism, it has created more investor concerns about the impact of higher currency volatility on the overall economy. While there is urgency for the BOJ to hike rates, the weaker-than-expected inflation and the strong USD resulting from expectations of a Trump win do not help.
On the other hand, flows have come back from China, and Japanese equities are breaking records, given expectations of better earnings results. However, valuations have become expensive again.
Asia investment grade bonds
Although there are expectations of two rate cuts this year, thanks to the softer inflation in the US, treasury yields will remain at higher levels with a steepening yield curve due to the increasing chances of Trump winning. Investors will likely be cautious in taking duration risk. Asian investment grade spreads have become even tighter. Meanwhile, with companies becoming more active with new issuances, supply will gradually increase.
Asia high yield bonds
Spreads have tightened significantly after the rally. Further upside on Asian high yield bonds has much narrowed. While there is no immediate downside, volatility may rise with higher political and geopolitical risks in the market.”
Emerging Market Debt
Spreads have become even tighter. With treasury yields likely remaining high going into the US election, the outlook for emerging market bonds remains volatile. Also, the heightened geopolitical risks will continue to weigh on the market.”
Gold
Gold prices continue to consolidate after breaking their historical high, which was expected. Gold remains a good geopolitical hedge in the medium to long term.”
In addition to geopolitical worries, investors are concerned about the de-dollarization trend, which will likely continue to support gold prices.
Multi-asset
A multi-asset strategy offers lower volatility compared to traditional single-asset or balanced portfolios. However, the correlation between risk assets, such as equities, credits, and commodities, has recently increased dramatically. In an uncertain environment with low yields, income becomes an essential source of return for investors.
By Kelly Chung, chief investment officer of Multi-Assets at Value Partners Group