Investors will face a patchwork of risks and opportunities during the second quarter of 2015 as trends in macro developments, economic growth, asset class and industry performance continue to diverge across the world, including Australia and Asia, says asset manager AllianceBernstein (AB).
In its second-quarter Global Capital Markets Outlook, the firm said it is tackling the uncertainty by implementing a broad, three-pronged investment strategy across the global asset spectrum
This consists of being “balanced in bonds, active in equities and making some portfolio allocation to alternative assets as a form of downside risk mitigation”.
Commenting on the economic backdrop to the Outlook, Guy Bruten, AB’s Melbourne-based Senior Economist—Asia Pacific, noted the divergence in economic growth and monetary policy between Australia and the US, with the Reserve Bank of Australia expected to reduce the cash rate again just as the US Federal Reserve is preparing to normalize interest rates for the first time since 2008.
“In Australia, the end of the commodities boom continues to play out in a familiar way,” said Bruten. “Capex is falling sharply as projects reach completion. Iron ore and coal prices continue their slide, pressuring profitability, domestic incomes and taxation revenue.”
Bruten noted that, despite the dearth of activity in non-mining exports or capital spending, the impact on the jobs market had been limited. “Looking through the noise, jobs growth has been in the 1-to- 1.5% range. While this is not bad, it’s not enough to stop the unemployment rate drifting higher.
“The key issue, in our view, is this: is the fact that unemployment has not deteriorated further an encouraging sign that ‘genuine rebalancing’ is occurring? Or is it built on a (temporary) burst of new housing activity?”
Anthony Chan, Hong Kong-based Senior Economist—Asia, said that, while the falling oil price had led to benign inflation in Asia, the region’s central banks had diverged on whether it was right to cut rates, with some (such as India, Indonesia and China) keen to lower rates but others (South Korea, Malaysia, the Philippines and Thailand) worried that doing so might overheat their economies.
“Given that inflation in Asia is structurally lower than in large developed countries, most Asian bond markets offer opportunities for relatively high real yields,” said Chan. “With the possible exception of Indonesia, Korea, China and Thailand, few Asian countries will come under pressure to raise rates once the US starts to normalize its own. That’s another example of divergence.”
In a high-level summary of its portfolio positioning in various investment strategies across different asset categories, AB said that, in fixed income, it maintains a balance between risk-reducing high- grade interest-rate securities and return-seeking credit-based risk, while taking a global and multi- sector approach in both rates and credit.
In equities, where the firm expects reasonably solid market returns over the next couple of years, it’s maintaining an active stance, seeing the importance of “being able to differentiate between winners and losers in capital markets as divergences occur. We are also overweight in risk-reducing equity strategies that may help navigate potential volatility.”
In alternative investments, such as long/short equities or credit, AB thinks exposures should focus on beta management or downside risk mitigation and alpha-driven absolute-return approaches which take advantage of divergences among securities and sectors.