Looking to the future
Our call to overweight position in equities vis-à-vis fixed income in our Key Investment Themes 2017 has benefitted those who have followed our recommended asset allocation as equities around the world have staged strong returns, particularly our preferred regional markets of Asia ex Japan and Emerging Markets which have charged ahead and delivered strong returns thus far, justifying our bullish call on the regions. A snapshot of how markets under our coverage have done on a year-to-date basis in 2017 can be seen in Table 1 below.
Table 1: Strong Returns YTD in 2017
| Market | Returns YTD | |||
|---|---|---|---|---|
Asia ex Japan |
22.6% |
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Hong Kong |
18.5% |
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Emerging Markets |
18.2% |
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China (HSML 100) |
18.1% |
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India |
17.2% |
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Korea |
16.6% |
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Singapore |
12.4% |
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Global Equities |
10.8% |
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Taiwan |
10.5% |
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Malaysia |
8.8% |
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US |
8.7% |
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Europe |
7.7% |
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Indonesia |
7.7% |
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Brazil |
4.2% |
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Japan |
4.2% |
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Thailand |
1.8% |
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Russia |
-9.9% |
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| Source: iFAST Compilations Returns in local currency, as of 8 June 2017 |
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Although markets have done well thus far, valuations have tracked higher as returns have outpaced the earnings revisions seen earlier and there has been a lack of continued strong positive revisions to earnings. Where once we saw plenty of forecasted returns in early 2016 when markets were having a fire sale and December 2016, this number has been in decline for most markets under our coverage since then as seen in Chart 1.
Chart 1: Lower Estimated Returns Moving Forward
Given the decline in forecasted returns, we are adjusting our recommended asset allocation. While we began the year with a +10% overweight in equities vis-à-vis fixed income, we are now reducing this overweight to +5% given the expectations of lower returns from equities moving forward (Table 2 below). We had previously called for Asian equities and Chinese equities to deliver returns of 40% and 60% respectively by the end of 2018 as mentioned in the articles Asian And Emerging Markets To Return 40% Over Next Two Years! and The Hang Seng Index Will Hit 32,000 By End-2018!. With Asian and Emerging Market equities delivering returns of 22.6% and 18.2% respectively, we are trimming our star ratings by 0.5 stars on the two regions to reflect their strong returns, higher valuations as well as lower estimated potential returns. They are now rated 4.5 Stars, down from 5.0 Stars but still within the "Very Attractive" rating. Single country markets that have had their star ratings adjusted downwards are Hong Kong and China for the same reasons as the two regional markets. Both single country markets are also rated 4.5 Stars now, down from 5.0 Stars but still within the "Very Attractive" rating as well after returning 18.5% and 18.1%. Table 3 below documents the changes in our Star Ratings.
Table 2: Asset Allocation Changes
Profile |
|
New Allocation (Bonds : Equities) |
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Conservative |
80 : 20 |
85: 15 |
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Moderately Conservative |
60 : 40 |
65 : 35 |
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Balanced |
40 : 60 |
45 : 55 |
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Moderately Aggressive |
20 : 80 |
25 : 75 |
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Aggressive |
10 : 90 |
10 : 90 |
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Source:iFAST Compilations |
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Table 3: Changes in Star Ratings
| Market | Annualised Estimated Potential Return (end 2018) |
Old Star Rating | New Star Rating | |||
|---|---|---|---|---|---|---|
Russia |
30.9% | 4.0 - Very Attractive | 4.0 - Very Attractive |
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China (HSML 100) |
25.8% | 5.0 - Very Attractive | 4.5 - Very Attractive |
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Korea |
20.9% | 4.5 - Very Attractive | 4.5 - Very Attractive |
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Hong Kong |
18.2% | 5.0 - Very Attractive | 4.5 - Very Attractive |
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Taiwan |
16.0% | 4.0 - Very Attractive | 4.0 - Very Attractive |
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Singapore |
14.3% | 3.5 - Attractive | 3.5 - Attractive |
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Emerging Markets |
14.0% | 5.0 - Very Attractive | 4.5 - Very Attractive |
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Indonesia |
12.7% | 3.0 - Attractive | 3.0 - Attractive |
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Asia ex Japan |
11.0% | 5.0 - Very Attractive | 4.5 - Very Attractive |
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Brazil |
9.4% | 3.5 - Attractive | 3.5 - Attractive |
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Japan |
5.7% | 3.5 - Attractive | 3.5 - Attractive |
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Thailand |
4.2% | 3.0 - Attractive | 3.0 - Attractive |
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Malaysia |
3.9% | 3.0 - Attractive | 3.0 - Attractive |
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India |
0.0% | 3.5 - Attractive | 3.5 - Attractive |
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Europe |
-1.6% | 3.0 - Attractive | 3.0 - Attractive |
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US |
-4.8% | 2.5 - Neutral | 2.5 - Neutral |
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| Source: iFAST Compilations Data as of 8 June 2017 |
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Going Neutral On US High Yield
In addition to reducing our overweight in equities vis-à-vis fixed income, we are also changing our view on US high yield bonds to neutral from a previously positive stance. Both yields and spreads for the riskier fixed income segment have come down from when we went positive on them, with the segment delivering a very good return of 22.1% from 8 March 2016 until 8 June 2017 in local currency terms. While the blow out in spreads allowed us to be positive on the sector from March 2016, the subsequent fall in yields and compression in spreads (even amidst a low risk-free rate) compels us to take a more neutral stance towards the sector.
Chart 2: Not Getting A High Yield For US High Yield
Chart 3: Spreads Are Compressed
Summary
As markets are constantly in a state of flux with opportunities and risks rising and falling, investors need to be ready to make the necessary adjustments to their portfolios to ensure they are positioned appropriately for the future. With the adjustments made to our recommended asset allocation, we believe that investors should be appropriately positioned to both weather and take advantage of risks and opportunities further down the road.
For investors who seek a more hands-off yet active solution could consider FSM MAPS (My Assisted Portfolio Solution). FSM MAPS can help investors with their asset allocation, product selection as well as periodic rebalancing should market conditions warrant it. Find out more about FSM MAPS here!
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