Assessing market sentiment amid the turmoil

Hong Kong investors are more willing to take the risk and increase holdings in the Chinese A-share market, as ongoing Sino-US trade tensions play havoc with market sentiment

The recent escalation in US-China trade tensions and the market downturn in 2018 have weighed on investor sentiment and risk asset performance. Asset managers suggest investors keep an eye on certain Asian markets and diversify their portfolio in order to maintain performance amid the market downturn.

After plunging to a decade low in the fourth quarter of 2018,  Hong Kong investors’ confidence has recovered sharply, returning to strongly positive territory, according to Chris Tong, Vice President of Retail Distribution,  J.P. Morgan Asset Management (JPMAM), noting that J.P. Morgan Hong Kong Investor Confidence Index registered 114 points as of April this year, putting it on par with the average levels recorded in 2017.

“Hong Kong investors always change the target and expectation just due to short-term factors and the market noise. From asset managers’ perspective what we want to focus on is a consistent and stable return in the medium to long run,” says Tong.

Due to uncertainties in the market - especially during the past three to six months - many investors have reduced their equity asset holdings. But that does not necessarily mean that investors should weigh down on this market

“Within equity, we see that Southeast Asia and India were less affected,” says Marcella Chow, Global Market Strategist, JPMAM, noting that these markets are less impacted by the ongoing trade tensions and that they have a role to play for those investors looking to diversify their portfolio.

Last year, the US performed the best with just a 4.4% drop in the equity market, according to JPMAM. The India equity market recorded a 7.3% drop, ranking the second, followed by Taiwan (-8.2%) and ASEAN (-8.4%).

Specifically, the US measures against Huawei will have a disruptive impact on global technology supply chains. “In the near term, there will be a degree of pain for a number of global semiconductor players who currently supply Huawei; however, in the long run, we believe that a few key Asian manufacturers will benefit as consumer demand changes,” says Nick Payne, head of global emerging markets, Merian Global Investors.

“In our view, companies that have both limited exposure to Huawei and the potential to see a boost in end demand are likely to outperform; Samsung Electronics is one such firm,” says Nick Payne, head of global emerging markets, Merian Global Investors.

JPMAM’s survey also finds that Hong Kong investors are more willing to take the risk and increase their holdings in the Chinese A-share market, according to Tong, who also points out that investors are emboldened by China’s supportive monetary and fiscal policy stimulus such as tax cuts and changes in bank reserve requirements.

One third (33%) of JPMAM’s survey respondents said the China stimulus measures had made their risk appetite more aggressive, with roughly the same percentage saying they would add to equity holdings as a result of the policies, according to JPMAM.

Furthermore, among global and Asia equity markets, China A-share market performed the best in the first quarter of this year with a positive return of 32.6%, according to JPMAM. In addition, the market ranks the top regarding the YTD returns.

In terms of the fixed income market, although this market had a decent performance in 2018 compared to equities, cautious sentiment is the major theme. Asset managers are adjusting their strategies against this backdrop of market uncertainty.

For instance, Goldman Sachs Asset Management has decided to scale back overweight exposure to emerging markets (EM) currencies and EM debt until there is more clarity on the direction of travel for both US-China trade relations and global growth, according to the company’s recent report.

Chow suggests investors incorporate a more diversified and defensive allocation to maintain a balanced portfolio under current market conditions.

“We think investors are right to be cheerful in the short term. However, global economic momentum would need to improve and translate into more earnings upgrades to sustain the growth. To prepare their portfolios, investors should consider adopting a more diversified and defensive allocation, such as incorporating more income-generating assets like US government bonds or high-dividend equities,” Chow suggests.

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