Institutional funds “have little choice but to turn to equities,” Hou wrote. “As the trend of ever-lowering bond yields continues on the back of a renewed cycle of policy easing by global central banks, other higher-yielding asset classes have risen to be the next ‘bond proxies.’”
Investors have been navigating a tricky path this year as the Federal Reserve pivoted from rate-hike plans to rate cuts, other global central banks became more dovish, geopolitics reared its head in the likes of the UK, Italy and Iran, and as the US-China trade war ramped up. Global stocks have lost US$1 trillion ($1.4 trillion) in value this week amid a stream of weak US and European economic data, with the MSCI ACWI down about 2% in the period.
Hou has been recommending a “barbell strategy” for some time now to deal with the uncertainty – some bets for assets that do well in a downturn, some that outperform in an upswing.
Dividend stocks are favored as bond proxies because “the constant dividend stream acts as a volatility dampener,” Hou wrote. He likes Singapore real-estate investment trusts, large China banks and European oil majors, he said.
Other takeaways from the asset-allocation report include:
• Bear steepening of US Treasury yield curve is “on the cards.”
• As the US-China trade war drags on, European earnings may continue to deteriorate because of the region’s big export exposure to emerging markets.
• The recent pullback in Chinese stocks creates an attractive entry point.
And he sees a favorable environment for gold.
“Against the backdrop of an unpredictable tug-of-war between easy monetary policies and geopolitics, gold will be favoured as an effective portfolio diversifier and to enhance risk-adjusted returns,” he said.
