Key Insights:

The first quarter of 2021 had a roller coaster ride across global markets. The year first began with optimism in equities, followed by market volatility amid the surge in bond yields. As a pulse check, most equity markets managed to end the quarter in the positive territory, while bonds posted mild, negative returns. How should investors buckle up for the volatility ride? Below are some questions that are recently asked by our investors.

Is the current level of bond yields sustainable?

When will the Fed start monetary tightening and taper on asset purchases?

Will China revert to a tightening monetary bias?

As compared to other developed markets, China has not been aggressively loosening its monetary policies. In fact, China’s RRR has not be reduced since Jan 2020, given the country was the first to recover from an economic downturn. The key is, I believe the Chinese government has plenty of bullets to relax policies if needed.

What’s your view on growth and value stocks?

Growth stocks were by far the performance winner last year. Since mid-February, I saw a style rotation shifting to value stocks. What is worth noting that the fundamentals of quality growth stocks have not changed, and valuations are now more reasonable with the recent pullback. This year, I believe the performance divergence between growth and value stocks will narrow and the overall performance contribution will be more equally spread out.

Where do you see opportunities for bonds? What about Investment Grade (IG) vs High Yield (HY) bonds?

For bonds, I see attractive opportunities in the Asian space. Asia still offers higher yields than other developed markets. Between IGs and HYs, I believe high quality HY bonds can benefit more from an economic recovery amid credit spread narrowing.

With the potential of the yield curve to further steepen, I prefer to use a short duration strategy. That said, once the situation stabilizes, my team may look for long-dated bonds to capture attractive yield opportunities. We would monitor the market closely.

How to capture opportunities without exposing to excessive risks?

What I’m seeing now is that the daily market fluctuations are getting higher than before, as compared to the pre-COVID days. I believe a balanced approach, with a combination of equities and bonds, would bode well amid the current market volatility while offering a better risk-adjusted return potential.

Comparing an Asia balanced strategy (50% equities and bonds) with a pure Asian equity strategy, the balanced strategy’s annualized 10-year return is 0.8% less than a pure equity strategy, but the volatility is significantly less – having only 60% of the pure equity strategy’s volatility. This is a result of including bonds which can effectively reduce volatility. At the same time, bonds can offer yield opportunities, while equity exposure can provide pockets of growth and dividend yield opportunities.