Perspective

Markets

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

Find out how you can capture income & growth opportunities in Asia in this environment.  

Falling interest rates, economic contraction & dividend cuts amidst the coronavirus crisis have made it much more difficult for many investors to achieve income & returns in 2020. 

We believe that a dynamic approach to asset allocation, active & focused risk management, and robust security selection are required to navigate the challenging external environment. We share a few quick tips for investors to better prepare for the headwinds ahead.

Focus on sustainable, high-quality income

Instead of picking the highest-yielding securities, investors should focus on the quality of yields on offer. 

Companies offering good quality yields typically have strong cash-flows from robust business operations, as well as a good management and governance that focus on delivering shareholder value.

In contrast, some companies may offer optically high yields, but such yields could be the result of a business in distress or through financial gearing (such as raising debt for dividend payments rather than supported by free cash-flows). 

Read on: The coronavirus impact on markets and the economy

Take a broad & diversified approach

Investors looking for yield typically look to bonds, but traditional sources of 'risk-free', high-quality income are practically non existent, forcing investors into higher risk assets such as equities and lower grade credit in search of more attractive yields. 

This problem is about to get much worse for income seekers amidst the current crisis. In the near term, earnings are expected to fall dramatically due to businesses being temporarily closed as a result of government-mandated shutdowns. Dividend cuts tend to follow earnings lower during recessions. 

In this environment, it is important for investors to take a broad and diversified approach across and within asset classes for higher and more secure income. From an equity perspective, we believe that Asia currently looks more attractive from a yield perspective, and the continent has also come through the Covid-19 crisis relatively unscathed. 

We also see selective opportunities in higher-quality credit. Corporate bond spreads in Asia are currently 1 to 2% wider versus the start of the year. As economies reopen, we expect good quality corporates to return to profitability. 

Active asset allocation & robust risk management are crucial

Taking risk may be inevitable when it comes to investing, but what is the best way to manage this when market conditions are volatile? Actively managing asset class exposures in your portfolio, as opposed to taking a static approach to asset allocation, can not only help reduce downside risk but also capture growth potential. 

Reducing exposure to currency risk is just as important. For example, if the depreciation of a certain currency against the base currency is expected to outweigh the costs involved, we would hedge out the risk.

Flexible, unconstrained security selection

We believe that selecting securities based on a market cap-weighted index is not an ideal way to achieve a consistent and sustainable stream of income. Each security must earn its place by either delivering attractive income or return potential, or providing diversification / risk-management benefits. 

For example, our Asian Income strategy is benchmark agnostic in terms of market, country and sector allocation, to ensure that we only employ the best income ideas in our portfolio.