What can investors do to better prepare for market opportunities and challenges?

In 2019, significant monetary policies from central banks around the world have helped both risky and defensive assets to deliver exceptional returns. However, as we move into 2020, valuation of asset classes is no longer as attractive after the strong rally last year. Continued risks from 2019, coupled with uncertainties around the Middle-east, US presidential elections, and the coronavirus (COVID-19) outbreak, have made it more difficult for investors to achieve income and return.

We believe a dynamic approach to asset allocation, active and focused risk management to mitigate downside risks, and robust security selection are required to navigate this more challenging environment in 2020. Here, we are going to share a few quick tips for investors to better prepare for the headwinds.

Focus on the sustainability and quality of income

Instead of blindly chasing yields, investors shall focus more on analyzing the quality of the yield on offer. 

For instance, companies offering good quality yield typically have strong cash-flows from a robust business operation as well as a good management and governance that focus on delivering shareholders’ value.

On the contrary, companies offering poor quality yield are usually with optically high yields, but such yields could be a result of business in distress or through financial gearing (such as raising debt for dividend payments rather than supported by free cash-flows). 

Select securities by taking a benchmark-unconstrained approach

We believe that a capitalization-weighted index is not an ideal way in achieving a steady income. Every security must earn its place in the portfolio by either delivering attractive income or return potential, or providing diversification / risk-management benefits.  For example, our Asian Asset Income strategy is benchmark agnostic in terms of market, country and sector allocation, to help ensure that investments are in the best income ideas.

Active asset allocation and robust risk management

During the course of achieving income, it is inevitable to take some risk. Instead of taking a static approach to asset allocation, actively managing asset class exposures can help with capturing growth potential as well as reducing downside risk. 

In addition, reducing exposures to currency risk is as important. For example, if the depreciation of certain currency against the base currency is expected to outweigh the costs involved, we would hedge out the risk.

Diversification through a multi-asset approach

Traditionally, investors looking for yield would mainly invest into bonds.  However, by focusing on a single asset class, or just a few names could bring concentration risks, in which any market wobble such as spreads widening could result in volatility. 

At the same time, some investors who are looking to access the growth of equities may also be worried about the market volatility associated with the asset class.

In such circumstances, taking a multi-asset investment approach may be a good way to help investors access their desirable investment outcomes, be it income or growth, in a more diversified manner.


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