Looking Ahead: Positioning your Portfolio for the 2nd Half of 2018

Investing

Looking Ahead: Positioning your Portfolio for the 2nd Half of 2018

We speak to wealth managers about market conditions in 2018 and their outlook for the rest of the year.

Published on 11 July 2018

In the blink of an eye, half a year has gone by. Here at WEALTH, we believe the summer months are a great opportunity to pause, reflect on your current investments, analyse future outlooks and rebalance your portfolio to ensure it continues to work hard for you.

Will market volatility continue? How will Asia perform? What are the promising markets and sectors to look into? We reached out to wealth managers for their opinion and to discuss how they are positioning their clients’ portfolios for the remainder of 2018.

Looking Back

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In contrast to the bullish financial markets in 2017, the first half of 2018 heralded the return of volatility, even as the global economy continued to expand. Among the challenges faced included higher inflation and increasing US interest rates. Political and geopolitical risks remained center stage, with the trade dispute between the US and China becoming an increasing concern on the back of global growth.

By the end of the first quarter, unfortunately, the growth trajectory started to lose steam. “[This was] led predominantly by a weakening in Euro Area economic performance,” says Jamus Lim, Economist from Thirdrock Group.

“To be precise, while the Euro Area has remained in expansionary territory till now, the strong above-potential growth that has prevailed over the past year or so has returned to its longer-term trend (of being closer to one percent).

“This was followed by a dramatic shift in sentiment among Emerging Markets (EMs), especially smaller ones, culminating in the ongoing crises in Argentina and Turkey.”

Within Asia, the situation has been a combination of good and not-so-good. China’s debt burden – its corporate debt market is valued at US$2.8 trillion – and the cessation of Japan’s expansionary streak are causes for concern. Asian EMs also saw a sudden reversals of capital inflows and growing exchange rate pressure.

“Consequently, we have recently shifted our short-term view on Asian EMs away from broadly positive toward an emphasis on being more selective towards companies with strong fundamentals that have been indiscriminately sold along with the broader market by passive outflows,” says Lim.

Bright Spots in 1H 2018

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The US economy, says Thirdrock’s Head of Discretionary Portfolio Management Vincent Ee, remained “the shiniest trophy in the cabinet”. The evidence is in its growth sustained at levels above its potential for the past few years, combined with strong macro fundamentals.

“More recently, US economic strength has been further supported by unprecedented late-cycle fiscal stimulus, which we regard as a long-run negative but is undoubtedly a boost to short-run economic performance. This is especially so in tech and biotech (robotics, cybersecurity, AI, semiconductors, healthcare, pharma), but also selected names in financials and industrials,” Ee adds.

There were also bright spots in Asia, including commodity-exporting economies such as energy and industrial metals in Malaysia and Indonesia. “[They] have also benefited from improved terms of trade and should continue to do well as long as global economic growth remains steady,” points out Ee.

SingAlliance’s Yu Lanhua and Raymond Kong feel that perpetual bonds issued by large Middle Eastern banks are another bright spot, as their prices have held steady, “In particular, we like the old Tier-1 perpetuals with upcoming call dates within the next couple of years.

“These are non-Basel III compliant subordinated debts, which will become senior if not called by the first available call date under the current regulatory framework. There are strong economic incentives for the issuing banks to redeem them early.”

In neighbouring Africa, frontier economies there, with their vast infrastructure needs, offered and continue to offer opportunities.

Forecasting 2H 2018

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A close watch should be kept on Europe, since its slowdown might spread first within the continent. Lim points toward how the slowdown in Italy and France might affect the strong performers of Spain and Germany. Secondly, it might also impact Asian economies exposed to it, such as China and Japan.

“In this regard, the major tail risk is a disruption to the already-slowing momentum from geopolitical risk, such as political instability in Italy, escalating trade tensions between the US and global trading nations, and an even more pronounced oil shock arising from persistent uncertainties among oil exporters, ranging from the Libyan civil war, Iranian sanctions, and intra-GCC disputes,” Lim says.

Within Asia, his periscope remains on China and Japan. The data has shown that their economic activity (as well as those of trade-exposed East Asian economies such as Singapore and South Korea) appears to be recovering from the slowdown in activity in 1Q2018, “This is heartening because it will serve as a counterweight to the slowing Euro Area and disruptions in certain EMs.”

Some of the themes and sectors Wealth Managers are looking at in 2H 2018.

  • Global EM bonds
  • Asian and US financial sectors
  • China Healthcare, Consumer and Industrials
  • Technology supply chain
  • Pharmaceutical industry
  • Asian consumer goods market

Recommended Portfolio Adjustments

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For those with low-risk appetites, Thirdrock’s Ee suggests re-looking your Eurozone exposure, especially if you have been overweight in 2017, and shift it toward the US, “This is not only because of the extant slowdown, but also because of the tail risks that may escalate over the summer, in particular from Italy (although that is not our base case).”

If you are heavily invested in EM, Ee’s advice is to exercise caution and selectivity, although he notes significant opportunities in China, Hong Kong and fast-growing Asian EMs such as Vietnam.

SingAlliance’s Yu and Kong sound the caution bell. They expect global economic growth to slow down in 2H2018, “In China, activity in capital intensive sectors has slowed. Business confidence across Europe has been declining with decelerating corporate investment. The impact of higher real rates and lower import prices on the US inflation rate has thinned out; labour demand has also gradually declined across vast sectors of the US economy.”

Their recommendation is therefore to reduce allocation to global equity for the third quarter, and increase exposure to higher quality (investment-grade) bonds with a longer duration. “These should come as a good hedge under the assumption that US inflation will temporarily decline,” they say.

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