2015Q1 INVESTMENT OUTLOOK

Transcription

1 TTG WEALTH MANAGEMENT 2015Q1 INVESTMENT OUTLOOK

2 TABLE OF CONTENTS Contents 2015Q1 Core Asset Allocation Summary Q1 Satellite Asset Allocation Summary Year-End Review 3 Investment Outlook for 2015Q1 4 House Views Equity Strategies 6 House Views Fixed Income Strategies 8 House Views Alternative Strategies 10 House Views FOREX Strategies 11 House Views Thematic Strategies 12 Investment Committee Members 14 Company Information 14

3 2015Q1 Core Asset Allocation Summary Asset class Sub category Our views Q1 Q2 Q3 Q4 Equities United States US will continue to lead the global economic recovery. Equities Europe European equities are expected to deliver moderate performance, assisted by the ECB. Equities Asia We expect Chinese stocks to outperform on attractive valuations as a strong catalyst. Moreover, we prefer to gain Japanese equities exposure through an Asian mandate. Equities Emerging Market Valuations of emerging markets equities are attractive but the implementation of policy reforms by the new leaders will likely result in volatility. Fixed Income Government US treasury bond is a great portfolio hedge during market corrections. Fixed Income Corporate Prefer investment grade issuances and underweight high yield positions due to tight credit spreads. Alternatives Commodities Underweight gold and commodities on the back of an appreciating US dollar. Alternatives Hedge Funds Among the alternatives investment classes, we prefer managed futures and CTA strategies. + = = = = = - + FOREX Currencies Our favourite currencies are US$, GBP & RMB. = + Overweight / = Neutral / - Underweight Page 1

4 2015Q1 Satellite Asset Allocation Summary Asset class Sub category Our views Q1 Q2 Q3 Q4 Thematic Global Financials Global financial sector offers an opportunity to outperform due to changes in demographics and restructuring. Thematic China A-share Returns on local wealth management products are now below 5%, which once again makes the A-share market attractive to retail investors. Thematic Global Infrastructure Global infrastructure investments are sustainable opportunities that will continue in the future as population and urbanization continue to take place on a global basis. Thematic Annuity Alternative to cash deposits that offers a guaranteed interest rate of no less than 3% per annum Overweight / = Neutral / - Underweight Page 2

5 2014 Year-End Review Before we provide detailed guidance for 2015, let us first review our asset allocation strategies in As a reminder, our asset allocation strategies for our core portfolios are regional based and our thematic strategies are designed for our satellite positions. All in all, our asset allocation strategies have done well in 2014 as we were positioned for a US dollar appreciation scenario. Our bias towards US$ denominated assets have boosted our returns and served as a great buffer during the periods of market corrections. Asset class Sub category 2014 Outlook Key Remarks in 2014 Equities Mature Markets Overweight (+) Focus on global brands Equities Emerging Markets (Ex HK / China) Underweight (-) Avoid soft currencies Equities Emerging Markets (HK / China) Overweight (+) Chinese equities offer attractive valuation Fixed Income Government Underweight (-) Sovereign issuances are likely to be volatile Fixed Income Corporate Underweight (-) Prefer hard currencies corporate issuers Alternatives Commodities Underweight (-) Gold and commodities no longer effective hedge Alternatives Hedge Funds Overweight (+) Prefer arbitrage and dislike macro FOREX Currencies Overweight (+) Favourite currencies are US$ and RMB Thematic Global Financials Overweight (+) Global financials benefit from industry restructuring Page 3

6 Investment Outlook for 2015Q1 Our emphasis for 2015 is divergence. We have seen increasingly divergent policies between the Federal Reserve (Fed) and the European Central Bank (ECB) & the Bank of Japan (BoJ) combination in the second half of While the US is going through normalisation of its monetary policies, both the EU and Japan continue to stimulate economic growth in a post tapering environment. The ECB and BoJ are undertaking necessary actions to replace the Fed as the source of capital required to maintain the price of assets. Without this support, it may destabilise the already fragile economic recoveries we are observing from the Eurozone and Japan. A lower oil price will also help various central banks to ease monetary policies without flaring up global inflations. The main impact from these divergent policies will be observed across different currencies due to the change in the supply (quantity easing) and demand (confidence) situations. As such, our bias will continue to favour a US dollar denominated portfolio. Despite the US dollar rally, we believe the dollar is still undervalued relative to other currencies after years of depreciation and would expect further gains in With regards to geopolitical risk, whether it was Ukraine, Middle East, China or Hong Kong, the impact on global markets were insignificant as global investors were overwhelmed by the global divergent of monetary policies. However, we expect geopolitical issues to continue to worsen, supported by social unrest around the world in We will continue to monitor the development of these situations and provide updates to our investors. PLEASE FIND BELOW OUR OUTLOOK AND INVESTMENT RECOMMENDATIONS FOR 2015Q1 Equity Highlights: Overweight US & China. Neutral for Europe, Asia and Emerging Markets We continue to favour US equities as they continue to lead the global economic recovery. We also believe global investors have gained a better understanding of China s importance for the global economic recovery. As a result, global investors will likely increase their exposure to China as most are still underweighted. We continue to prefer bottom up stock picking strategies that focus on global franchises and leaders in their respective fields. In addition, we prefer strategies that are hedged against the US dollar. For defensive investors, we would recommend equity strategies that focus on dividend growth, while traditional defensive / stable dividend sectors are trading at a premium. Moreover, our preferred way to obtain Japanese equities exposure is through an Asia Pacific mandate. Page 4

7 Fixed Income Highlights: Neutral with a Preference for US$ Denominated Bonds Looking at fixed income performance in 2014, despite the strong evidence that the US economy continues to recover in a healthy manner, the lack of growth and the risk of deflation in Europe has dragged down global bond yields. Moreover, US dollar denominated debt has provided a great buffer for an equity portfolio during the periods of market corrections. We prefer corporate issuers or quasi government issuance which can offer decent gross yields and are not exposed to soft currencies. As such, we prefer unconstraint bond managers that have flexibility to control their net exposure and portfolio durations compared to the benchmark targets. Alternative Highlights: Overweight Commodity Trading Advisors (CTA) / Underweight Gold & Commodities As the valuations for bonds and equities continue to be expensive, there are greater benefits to hold alternative strategies in one s portfolio. Among the alternatives investment classes, we prefer managed futures and CTA strategies. We continue to stay away from gold and commodities on the back of an appreciating US dollar. Forex Highlights: Overweight US$, GBP & RMB We prefer hard currencies (US$ & GBP) over soft currencies as a denomination of assets. On the back of a depreciating Japanese yen and a strong US$, we also favour the RMB on a relatively basis. Thematic Highlights: Overweight Global Financials, China A-Share and Global Infrastructure. Fixed Annuity Products Continue to be our Preferred Vehicle for Retirement Portfolios Since the initiation of the global financials and Chinese monetary reform, both sectors have been unloved by global investors due to the uncertain outcome. However, we have reached a turning point and we expect equities related to the global financials and China s A-shares sectors will benefit from these understandings. Global infrastructure investments are sustainable opportunities that will continue in the future as population and urbanization continue to take place on a global basis. We would recommend investments in fixed annuity products with principal protection features for investors that prefer a non-portfolio investment approach or are highly sensitive to portfolio fluctuations. Investment Committee - December 10, 2014 Page 5

8 House Views Equity Strategies WE CONTINUE TO OVERWEIGHT EQUITIES: 1. Global economic activity to recover with ongoing accommodative monetary policies. 2. Provide better valuations compared with bonds, especially in this low cost of capital environment. We continue to favour US equities as they continue to lead the global economic recovery. We also believe global investors have gained a better understanding of China s importance for the global economic recovery. As a result, global investors will likely increase their exposure to China as most are still underweight. We continue to prefer bottom up stock picking strategies that focus on global franchises and leaders in their respective fields. In addition, we prefer strategies that are hedged against the US dollar. For defensive investors, we would recommend equity strategies that focus on dividend growth, while traditional defensive / stable dividend sectors are trading at a premium. Moreover, our preferred way to obtain Japanese equities exposure is through an Asia Pacific mandate. UNITED STATES - US equities continue to be a solid investment and US will be leading the global economic recovery. - First rate hike in US will likely be in 2015Q2 at a slow pace of further rate hikes due to (1) mild inflationary environment and (2) sluggish Eurozone recovery. EUROPE - European equities are expected to have moderate performance assisted by monetary support by the ECB. - The latest ECB announcement on December 4 th, 2014 indicates key interest rates will be left unchanged in the near future without further policy easing at this stage. The market expects further easing will be announce as early as 2015Q1 as (1) the outlook for inflation is still worsening and (2) to fulfil its stated goal to expand its balance sheet back to 2012 levels. - UK fundamentals continue to be robust despite a weakening Eurozone and the Bank of England (BoE) is likely to remain on track for their first rate hike in 2015Q2 Page 6

9 ASIA - Chinese equities have seen a strong rally in recent months and we expect the rally to continue in 2015 as valuations are still trading below their historical averages. We expect the A shares to outperform the H shares as the investment returns offered by the local wealth management products are now below 5%, which once again makes the A-share market attractive to retail investors. - China surprised the market by cutting interest rates and global investors believe it is a sign of significant easing, which we disagree with. We believe the rate cut is part of the reform agenda to internationalize both the RMB and the banking standards in China. The next part of the reform would include the introduction of deposit insurance scheme, deposit rate liberalisation and further adjustment to the reserve requirement ratio. - Monetary policies will remain one of the key drivers for Japanese equities. Similar to last year, we expect the performance of Japanese equities to be binary and volatile. - The Japanese equity markets are the most vulnerable from the yen depreciation rally. Whether Japan can translate itself towards a more growth driven economy under Abenomics remains a question and we prefer to gain Japanese equities exposure through an Asian mandate. - For the rest of Asia, the situation is quite mixed and we are remaining neutral as a whole. EMERGING MARKETS - The valuation for various emerging markets equities are attractive compared with their historical averages - The new leadership in various emerging markets (India, Brazil, Indonesia, etc.) faces challenges in implementing reforms and will likely result in greater volatility for their respective equity markets. - Underweight commodity-exporting emerging markets countries such as South Africa & Russia, which continue to see downward revision to growth expectations on weak commodity prices. - The latest consumer price inflation (CPI) for Russia in November (9.1% YoY) was higher than consensus. With a high inflation number and the weakness in commodity prices, we expect weakness to continue with the ruble and Russia equities. - The outlook for emerging markets equities remains weak due to currency vulnerability. This will result in the outflow of foreign capital from these economies and equity markets. Page 7

10 House Views Fixed Income Strategies WE ARE NEUTRAL WITH FIXED INCOME: 1. For bonds, especially with high yield issuance, we observed an influx of lower quality issuers coming to the market and raise debt easily. For some areas, the issuers can even launch without a proper credit rating. 2. In addition to income, fixed income allocations also protect the overall portfolio from market corrections. Both high yield bonds and emerging market sovereign bonds have a high correlation with the global equity markets and are not effective portfolio hedges given their rich valuations and local currency exposure. Looking at fixed income performance in 2014, despite the strong evidence that the US economy continues to recover in a healthy manner, the lack of growth and the risk of deflation in Europe has dragged down global bond yields. Moreover, US dollar denominated debt has provided protection for the equity portfolio during the periods of market corrections. We prefer corporate issuers or quasi government issuance that can offer decent gross yields and are not exposed to soft currencies. As such, we prefer unconstraint bond managers that have flexibility to control their net exposures and portfolio durations compared with the benchmark targets. GOVERNMENT BONDS - We are now neutral on US treasuries, but as they are great portfolio hedge during market correction. - US agency related bonds are very sensitive to the change in interest rates. - Underweight sovereign issuances in central Europe as the yields are very low in this region. Moreover, they are denominated in Euro, a weakening currency. - Underweight emerging market sovereign debt as this is vulnerable due to soft currency exposure. - To gain government bond exposure, the optimal method is through quasi government corporations in countries with positive net foreign asset status and hedged against US$, GBP or RMB. Page 8

11 CORPORATE BONDS - Prefer corporations that are denominated in hard currencies. - Aggressive investors may consider subordinate issuances from investment grade issuers as we are not negative on credit risk or the forecast of default rates. - For investors whom are concerned with mark to market price volatility, it would be ideal for them to hold direct bonds rather than bond funds. - Underweight high yield positions as the credit spread are very tight. For yield enhancement, we prefer quasi government corporate issuance that can offer decent gross yields with better protection. VIEW ON RMB CORPORATE BONDS RMB onshore bonds are bonds that are issued in China by China corporations (NOT dim sum bonds in HK), and are therefore less sensitive to global interest rate movements. Based on our observations in 2014, our fear for these bonds failing to refinance themselves has eased off. However, their yield has also come down from 5-7% in early 2014 to below 5%. Page 9

12 House Views Alternative Strategies WE CONTINUE TO OVERWEIGHT ALTERNATIVES: 1. As the valuations for bonds and equities continue to be expensive, there are greater benefits to hold alternative strategies in one s portfolio. 2. De-correlation investment holdings will play a more significant role in the portfolio and our preferred strategy for 2015 is managed futures / CTA strategies. COMMODITIES - Gold is no longer an effective alternative for the US dollar. - We continue to expect the US dollar to appreciate, a negative factor for commodities prices HEDGE FUNDS - The managed futures strategies have outperformed most hedge fund strategies in These strategies have been an underperformer since 2010 due to the disruptions caused by the central bank intervention and subdued volatility levels. This year was a turnaround year for these strategies as there was raising volatility across currencies and commodities combined with gradual withdrawal of central bank intervention. We expect these strategies to continue to outperform in Due to our investment mandate, we prefer investment strategies that can offer investors liquidity. Although, some of the best investment opportunities are in the private equity space. As the valuations for bonds and equities continue to be expensive, there are greater benefits to hold alternative strategies in one s portfolio. Among the alternatives investment classes, we prefer managed futures and CTA strategies. We continue to stay away from gold and commodities on the back of an appreciating US dollar. Page 10

13 House Views FOREX Strategies RECOMMEND OVERWEIGHTING US, GBP & RMB AS WE ANTICIPATE 1. Soft currencies to be vulnerable due to a strong appreciating US dollar 2. As the global economies continue to stabilise, US$ will continue to be strong. We anticipate the US$ interest rate will continue to be depressed for an extended period of time. Ultimately, we do not believe the US can raise rates in a high debt and low inflationary environment. 3. RMB is preparing itself for internationalisation and will experience volatility due to this reform. We prefer hard currencies (US$ & GBP) over soft currencies as a denomination of assets. On the back of a depreciating Japanese yen and a strong US$, we also favour the RMB on a relative basis. Page 11

14 House Views Thematic Strategies Since the initiation of the global financials and Chinese monetary reform, both sectors have been unloved by global investors due to the uncertain outcome. However, we have reached a turning point and we expect equities related to the global financials and China s A-shares sectors will benefit from these understandings. Global infrastructure investments are sustainable opportunities that will continue in the future as population and urbanization continue to take place on a global basis. We would recommend investments in fixed annuity products with principal protection features for investors that prefer a non-portfolio investment approach or are highly sensitive to portfolio fluctuations. GLOBAL FINANCIALS - There are many restructuring stories that are taking place in the developing markets and we anticipate many re-rating opportunities in this sector. For example, UBS has moved from a 50% investment bank / 50% wealth management business model to a 20% investment bank / 80% wealth management model which will result in a higher return on equity (ROE) for the bank. - Many financial institutions in the emerging markets have been increasing their leveraging since the global financial crisis, as observed in On the contrary, many financial institutions in the developed markets have been deleveraging their balance sheets and off loading second tier assets since the global financial crisis and we anticipate the beginning of another credit cycle early next year. CHINA A-SHARE - Returns on local wealth management products are now below 5% which once again makes the A-share market attractive to retail investors. - Chinese stocks have seen strong rally in recent month and we expect the rally to continue as valuations are still trading below their historical averages. The A shares markets will benefit from various market reform incentives. For example, the Shanghai Hong Kong Stock Connect. - We list A-Share to be a thematic play and not a core position as they are freely accessible by global investors. This however, is one very important growth driver as the A-Share market will continue to open with many investors underweighting Chinese equities. Page 12

15 GLOBAL INFRASTRUCTURE - Population growth and global urbanization are creating growth of infrastructure projects. Moreover, development in new technology, such as shale gas, is promoting the continued development of infrastructural related activities. - We favour infrastructural investment opportunities in the developed markets as (1) in Americas, the demand for new facilities are the result of technological development (i.e. Shale gas) and (2) in Europe, the economic recovery has made infrastructural spending a top priority as a source of jobs creation. - In emerging economies, demand for infrastructure investments is also accelerating driven by urbanization. However, the risk of investments in these projects are relatively higher compared to the developed markets as the projects in emerging markets are often development projects while the opportunities in the developed markets are upgrade of existing infrastructure facilities. - In addition, corporations in the developed markets often hold an established portfolio that generates steady cash flow that can buffer the risk from new projects. ANNUITY - Can be used as a cash deposit or retirement planning vehicle that generates a guarantee interest rate of no less than 3% per annum. - Upon the completion of the contribution period and the age of 55, the plans can be converted to a defined benefit annuity income plan. Similar to the old civil servants pension schemes. - The return of an annuity plan is predictable and not subject to market volatility. Page 13

16 Investment Committee Members JON DINGLEY MD / RO KEVIN LIEM CIO / RO RICHARD JONES RO JASON GOING CFO JIMMY IP ANALYST Company Information TTG (HK) Limited Suite 501A, 9 Queen s Road Central, Hong Kong Tel (852) Fax (852) Page 14