Keep your portfolios globally diversified as rates fall, Asean growth picks up: panellists

• James Cheo, chief investment officer, South-east Asia, HSBC Global Private Banking and Wealth
• William Goh, portfolio manager, fixed income, HSBC Global Asset Management, Singapore
• Lee Su Shyan, associate editor, The Straits Times
• Moderated by: Jeffrey Yap, head of investments and wealth solutions, South-east Asia, HSBC Global Private Banking.

Yap: What is your outlook for 2024? Are you cautiously optimistic, pessimistic or optimistic?

Cheo: Cautiously optimistic. We had a bull market in the US in 2023, so it is very hard to have another bull in 2024. I think it is likely to be an older bull in terms of the stock market for 2024.

Yap: What is the top risk for the market?

Goh: From a fixed income perspective, one of the top risks would be inflation creeping back, as this would have implications for the path of interest rates, and consequently, many other financial markets.

Cheo: Geopolitics is difficult. I wish there was one silver bullet to solve the whole issue, but there isn’t one because it’s extremely complex. I think to (navigate the risk), we should build a diversified portfolio globally.

There are some tilts that we can make – towards commodities, for example, because if there is a war or heightened geopolitical tensions, there will be demand for critical commodities, especially those associated with transition energy or semiconductors.

But ultimately, a globally diversified portfolio has shown time and again over the years to thrive, especially amid rising geopolitical risks.

Yap: Some investors say that China’s equity market is not investable. Do you agree with that? What should investors do?

Cheo: I disagree with the notion. I think China is investable, but you have to be very selective to find areas of growth.

Clearly, there is a lot of political uncertainty associated with investing in China, but a lot of that is already in the price. Therefore, you want to find where things are still going in China. For example, the EV (electric vehicle) sector is looking quite solid, despite a pullback in price earnings.

China is slowing down in terms of growth. It won’t grow at 10 per cent anymore; it’s likely going to grow at 4 to 5 per cent in the years ahead. But I think you cannot ignore that it is still the second-largest economy, although I don’t think that we should chase it.

Lee: I think China is a huge economy that you can’t afford to ignore; you would definitely still have to remain invested there.

If you are not in China and are looking to get in, given that valuations are down, it might be an opportunity to see where the attractive sectors are. But if you’re already in and sitting on losses, given the uncertainty at this point, I think you just have to sit tight.

Yap: What is your top conviction for this year?

Cheo: I would prefer the top conviction to be a globally diversified portfolio, rather than all in on Asean and India equities. But having said that, if you didn’t have Indian equities in the construction of an Asian portfolio, over the last 10 years you would have underperformed.

So there is a need to consider Indian equities, and increasingly Asean equities, into the portfolios, especially when you think about Asia and its areas of growth and opportunities.

Goh: The audience has indicated some interest in “global investment grade bonds”, and we can look closer at the “longer duration” segment.

Bonds are one of the ways to diversify your portfolio. The longer the duration, the larger your “multiplier” for capital appreciation if interest rates decrease and vice versa, because bond prices move inversely to interest rates and proportionally with duration.

When extending duration, having investment grade instead of high-yield bonds helps in reducing credit risk. Going “global” is another way of diversifying your portfolio.

Consider going beyond one country, or even beyond simply Asia, to construct a globally diversified bond portfolio.

Yap: What is the current view on Singapore real estate investment trusts (S-Reits)?

Lee: I’ve always been in favour of the S-Reits because I’m a pretty conservative investor, and (they) have definitely delivered over the past years. It’s a stable source of income in your retirement.

I think we definitely should still keep the faith with S-Reits. If you’re already invested in the S-Reits, they are a steady source of income. So try not to look at the capital losses, and I’m confident that they will come back.

Quite a number of S-Reits are diversified in different sectors, geographies, and so on. The S-Reits still offer really decent yields. You’ll get your exposure to your different countries, as well as the sectors. Maybe not so much of the office, and maybe not the US, but certainly you can get decent prospects in industrial and logistics.

Yap: What’s your view on the Singapore economy?

Cheo: I think Singapore’s economy this year should do better than last year. It can easily grow 2 to 3 per cent, compared to when it was much slower last year.

On the back of that, we are seeing a recovery in the global electronics cycle. It’s still early days in this upturn – many people bought electronics during the pandemic, and since then, no one has really upgraded. So that is starting to bring about a reintegration in the electronics cycle and I think Singapore would benefit from it.

The domestic economy is very resilient and consumption is strong. Hopefully, tourism should also do better this year compared to last year. So overall, we should see a fairly reasonable kind of growth.

Yap: Given that rates were high in 2023, a lot of money was in deposits and short-term bills. Do you think that is a right strategy to have in 2024?

Goh: Yields on MAS (Monetary Authority of Singapore) bills and six-month Singapore treasury bills (T-bills) have been trending lower.

To illustrate, the cut-off yield on the six-month T-bills auction on Feb 1 came in at 3.54 per cent. In previous auctions of the same tenor, cut-off yields came in at 3.73 per cent on Aug 17, 2023 and 4 per cent on Jan 18, 2023.

This means that a strategy of re-investing in, or rolling, six-month T-bills upon maturity would have given incrementally lower interest rates upon each “roll” over the same period. In other words, the investor’s return is becoming lower, even though risk is similar.

Should central banks start easing this year, interest rates will fall further, resulting in increasing re-investment risk as investors struggle to maintain the same yield without increasing risk.

This is where the “duration barbell strategy” comes in – it conceptualises a simultaneous allocation to both the short and long ends of the bond duration spectrum.

This captures both the relatively higher yields of short-term bonds – as compared to longer term bonds – as well as the capital appreciation potential of longer-term bonds when interest rates fall. Ideally, both ends of the barbell should be well diversified.

Yap: With the India and Indonesia elections, why are people still bullish on those two markets?

Cheo: The elections do create uncertainty, but we think that those uncertainties may provide opportunities. It seems like they’re still going to be very much status quo when it comes to policy continuity.

In Indonesia’s case, the candidates are all very much still pro-business and following reforms. In India’s case, it seems like the incumbent still has a very strong showing in polling terms. From that perspective, I think that there are opportunities in these markets because the growth potential for India and Indonesia should be strong.

Yap: Given the yield curve is inverted, where is the preference of duration for fixed income?

Goh: Rather than targeting a particular duration number, a duration barbell strategy would help provide higher yields at the short end of the yield curve, as well as provide exposure to the longer end for greater capital appreciation when interest rates go lower.

It also helps to address uncertainty around when and how interest rates will move, because there is no need to precisely time a single move to increase duration. Instead, one can move gradually into a long duration bond portfolio without giving up too much yield along the way.

Yap: What is your outlook on Singapore equity markets?

Lee: Everyone I talked to tells me that the Singapore market is dead, but I am a great supporter of it because I think it’s safe and we’ve got good governance.

Our currency is also strong, so it keeps the value of your stocks up. You may have put your money in other markets, but also lost on the currency exchange. We’ve got good Singapore companies. There are also many companies with their own geographical exposure.

Looking a bit more closely, I agree that the growth rate may not be as high as some other markets. But keep faith. If the Singapore market is undervalued, why not take the plunge?

Yap: What is your view on the yields on Singdollar T-bills this year?

Lee: Looking at the recent six-month T-bill auction results, it is quite a big difference from the early January one. In just a few weeks, the six months’ T-bill yield has come down.

It really does show that people do expect rates to come down. So I would defer to William, that you still need to have that short term, and also a bit of strategy for that longer term.

Yap: Given that the soft landing is your base case, what are the odds of a hard landing?

Cheo: There is always a risk of a hard landing in the world economy, but I think there has to be a very big shock. Typically, when you have a big shock, it’s a combination of high leverage as well as high interest rates.

We are in an environment in which interest rates are falling. There might be pockets of leverage in the system; we saw that in March last year in parts of the banking sector. But with falling interest rates this year, the chance of a hard landing is now much lower than, say, in March of 2022.

Yap: What if interest rates don’t fall as fast as people expect?

Goh: It is important to revisit James’ earlier point of having a well-diversified portfolio. When we say diversification, most people think of diversification between countries, sectors and issuers.

Diversification across the duration spectrum could be useful too. This can be achieved by having exposure to both the long end and the short end of the yield curve, via the duration barbell strategy.

The short tenor bonds in the “duration barbell strategy” provide compelling yields even if interest rates do not fall as quickly as the market expects. Meanwhile, the long tenor bonds would still provide capital appreciation when interest rates eventually decrease, albeit slower than previously expected, and in proportion to the duration “multiplier”. Hence, balance is the key, where we have a bit of both ends of the yield curve.

Another benefit of having exposure to the short end is that there is a larger variety of issuers from different countries and sectors, as compared to other longer duration segments. This is because no matter what the original tenor of a bond was when it was issued, that bond’s duration gradually shortens as it “rolls down” towards maturity, and will eventually become shorter than one year.

There are bond funds that are already invested and well diversified within this short duration segment. This can help provide diversification when combined with the long end portion of the “barbell”, where there might be fewer issuers, because not every issuer has long-end bonds outstanding.

Cheo: The fact of the matter is that inflation has peaked and is falling; it’s just a question of how fast and when. When deploying cash, or when thinking about investments, it’s important to consider various strategies that suit your needs, including the barbell strategy that we talked about.

This is an excerpt of the panel discussion at HSBC Premier’s Elite Market Outlook 2024 on Feb 6.