Emerging markets equities seen overweight in 2017

Emerging markets equities, especially those in Asia, are likely to deliver a good returns in 2017 to investors with the appropriate risk appetite, given the improved macroeconomic fundamentals in these economies, said an industry expert.

“While the new year is usually a good time to review investment strategies, we don’t expect the current economic cycle to end anytime soon,” added Cedric Lizin, head of Middle East and Africa, Barclays Wealth and Investment Management.

“In light of world economy growth being at just above stall rates, we recommend maintaining a tactically diversified portfolio, as it is essential for protection against market volatility. We also advise to keep investment portfolios tactically tilted towards Developed Markets Equities, with a focus on the US and continental Europe.”

Lizin was commenting on latest edition of the Compass report, published by Barclays, which examines major asset classes globally.

The report includes the bank’s tactical recommendations on portfolio asset allocations. Published by the Barclays’ Wealth and Investment Management division, the quarterly research focuses on providing investment advice and recommendations to investors around the world, including the Mena region.

The US stock market, which has rallied recently to record highs driven by banking, industrial and technology equities, is seen as the market of choice within the asset class. Meanwhile, continental Europe and UK equities came in second and third place respectively.

The report has increased its allocation to Emerging Markets Equities from neutral to overweight, as the business cycle is seen to have reached bottom, a view that is supported by business confidence surveys and trade data. In addition, the fundamental economic factors have positively influenced corporate profitability within the asset class.

Meanwhile, ‘Compass’ lowered its neutral allocation for Cash & Short-Maturity Bonds to underweight, due to the increased appeal of Emerging Markets Equities. In terms of Developed Government Bonds, the Q1 2017 Compass report has lowered its allocation from neutral to underweight, citing the negligible returns for most government bonds in the developed markets.

The report also maintained its overweight allocation to High Yield & Emerging Markets Bonds; this is in light of a more upbeat outlook on various risks to global growth and inflation, in addition to the attractiveness of yields on junk credit, based on a risk-reward basis.

The latest edition of the report has assigned an underweight allocation to Investment Grade Bonds, due to minimal returns on high quality corporate credit. Meanwhile, Compass assigned a neutral allocation to Commodities, highlighting that investors are more likely to benefit from tilting their investments towards oil as supply/demand issues subside.

Meanwhile, gold is seen as a less attractive option as it continues to be susceptible to further US interest rate hikes. Additionally, the report assigned a neutral strategic allocation to Real Estate and an underweight to Alternative Trading Strategies. (Source:  TradeArabia News Service)

Chinese investors losing appetite for bonds in 2017

Reuters: Stung by a late-2016 tumble in bonds, Chinese investors are signalling a switch into shares this year in the hope of better returns as the economy recovers and as a hedge against rising inflation and tighter monetary policy.

That would be a dramatic reversal from last year, when assets under management for bond funds surged 142% to 1.93 trillion yuan ($280 billion), while equity and balanced fund assets dropped 17% to 1.99 trillion yuan, according to data from Chinese consultancy Z-Ben Advisors.

“Bond investors face the triple whammy – rising inflation, improving economy, and tightening liquidity,” said Xie Yi, executive director at First Seafront Fund Management Co.

While China’s main stock index fell 12% last year, yuan-denominated bonds had been moving the other way, with benchmark 10-year bond prices rising enough to knock 200 basis points off yields from mid-2014 to October last year.

But a two-month bond sell-off late last year sent yields up again, reclaiming nearly a third of the gains, as concerns over capital outflows and a falling yuan spooked investors.

The yields have risen a further 15 bps to 3.22% in 2017 as China intervened to defend the yuan.

“We’re at a turning point in liquidity conditions,” said Gu Weiyong, chief investment officer at Ucom Investment Co, as central banks shift toward tighter monetary policies both in China and the United States.

Gu, who slashed his bond holdings at the end of last year, said he only sees some “trading opportunities” this year in China’s bond market, as “yields will likely rise further, along with inflation”.

Inflation in China has been picking up in line with the rally in commodities, feeding off government’s economic stimulus and restructuring efforts. In September a rise in producer prices ended nearly five years of deflation, and they surged 5.5% in December.

The change in perception is already having an impact on the sales of bond funds, which were popular last year. With interest waning, a number of fund houses, including China Asset Management Co, GF Fund Management Co and Wanjia Asset Management Co, have extended the subscription periods for new bond funds over the past month.

“2017 will be a year of tighter monetary policies, and higher yields, so we need to be cautious when allocating assets into fixed-income products,” said Chen Liming, head of the wealth management unit at Everbright Securities Co.

But stocks look increasingly attractive, he added.

“The economy has bottomed out, and listed companies’ profitability is improving, so we should allocate more to equities.”

UBS China strategist Gao Ting expects China’s stock market to rise around 6% in 2017, driven mainly by improving corporate fundamentals, and Franklin Templeton Sealand Fund Management Co. Ltd. has also forecast that Chinese stocks will trend up in 2017.