Global economy is seeing a multispeed recovery, led by the developed nations and China.
Headwinds to growth remain elevated.
These include the emergence of new Covid variants, delays in vaccine deployments, rebalancing of China’s economy and normalisation of interest rates. Nonetheless, recovery would be supported by the release of pent-up demand and a new capex cycle.
A shorter and more volatile cycle.
The swift rebound was observed across markets, including equity and property. Concerns on asset bubbles persist driven by low yields and strong earnings.
Domestically in Malaysia, growth trajectory is conditional on the framing of the new narrative.
Relative to the Global Financial Crisis (10% of GDP), less stimulus is deployed in the current crisis (6% of GDP), amid a narrow fiscal pace. Restructuring of fiscal expenditure and revenue (e.g., broaden tax base) is vital.
Tactical asset allocation from the perspective of different horizons.
Barbell investment strategy implemented in the medium-term. Value stocks benefit from positive vaccine developments and physical proximity, while growth stocks benefit from concerns on Delta variant, social distancing measures and the rise of virtual world. This strategy works well as the path to reopening is not straight.
Remain vigilant by focusing on quality stocks.
These include firms with solid underlying fundamentals, high profitability, manageable debt and consistent earnings. Quality stocks are trading at the cheapest level in two decades, registering as amongst the best performing factors this year.
Shift towards a hybrid asset allocation model.
60/40 asset allocation formula is forecasted to generate 3.5% return, lower than the 10% return in the past four decades. Given the prolonged low yield environment, a hybrid asset allocation model is recommended, encompassing of fixed income with equity-like returns.
Investors need to be opportunistic and diversify risk against policy headwinds in China.
Chinese government’s fixed income offers good risk-adjusted returns.
Given the yield differential with developed markets, stable currency and low allocations by global investors, Chinese government bond is an attractive asset class for diversification. Bullish on China in the long term, as the nation continues to develop its capital market and as its economy expands further.
Investing in China is not optional, need to diversify and manage regulatory risks as the economy still provides big potential.
Common prosperity is a long-term development goal, that focuses on the new economy. More regulations are expected in the areas of housing, transportation and education that impact middle-income class. There is still opportunity in a disciplined allocation to China and we need to identify factors that drive alpha.
Alternative data is an integral input for investment decisions in China.
China has an abundance of high-conviction and valuable alternative data (e.g., credit cards, job posting, social networks), with strong predictive power and granularity, as opposed to what is available in the US.