Growth in focus: finding the ace among A-Shares
Amid China’s long-term structural growth trends, which are the sectors that could stand out in the A-Share market?
Yield seeking1 and volatility management are among the top priorities for investors in uncertain markets. A multi-asset portfolio investing in a range of uncorrelated assets3 could help investors manage volatility as the individual asset classes react differently to market events.
Securitised debt3, for example, could act as a diversifier2 because it tends to be less correlated to equities and HY bonds. Unlike equities and HY bonds which are more closely tied to corporate balance sheets, the underlying assets of securitised debt are mostly loans extended to individuals. This means tapping into the balance sheets of consumers.
Securitised debt is created when certain assets such as mortgages or other types of loans are pooled together and repackaged into interest-bearing securities. Based on the different types of underlying assets, securitised debt can be classified into various groups such as ABS and MBS.
They are created from the pooling of non-mortgage assets such as auto loans, personal loans and credit card receivables. And they are generally issued by private entities.
They are created from the pooling of mortgage assets and can be categorised into agency and non-agency MBS.
By comparing ABS, non-agency CMBS and non-agency RMBS with risk assets such as equities and HY bonds, the following three charts illustrate how these non-agency securitised debt could help diversify1 a portfolio’s risk and return.
ABS, non-agency CMBS and non-agency RMBS have historically exhibited low (less than 0.5) and sometimes even negative correlations to equities and HY bonds. When these risk assets underperform in a down market, non-agency securitised debt are unlikely to follow suit, thus providing diversification1 to a multi-asset income portfolio.
Correlation4* with equities and HY corporate bonds
During periods when the S&P 500 Index delivered negative returns of more than 5%, ABS, non-agency CMBS and non-agency RMBS have demonstrated more resilience compared to equities and HY bonds. An allocation to non-agency securitised debt could add some stability to a portfolio in uncertain markets.
Returns4** during periods of S&P 500 drawdown (> -5.0%)
US consumption strength and declining household debt6 are the bright spots amid the nation’s longest economic expansion in history. Over the past 20 years, the ABS market has delivered a track record of positive total return on 18 occasions.
Total returns of ABS in the past 20 years5
In the search for income and returns, our Multi-Asset Solutions (MAS) team strives to maintain a diversified allocation to manage risk without overstretching for yield1. With the economy in a late cycle, our MAS team has been de-risking our multi-asset income strategies by adding more quality within our fixed income allocation.
As of end-October 2019, our MAS team has:
3. Overall, we have lifted the weighting of higher-rating fixed income assets (i.e. those with credit rating of A- or above) to 11% from 1% in December 2017.
Market volatility and lower yields are here to stay. Investors could seek a diversified2 multi-asset income portfolio based on their investment objectives and risk appetite. In addition to seeking exposures to a range of uncorrelated asset classes, securities selection within each asset class is also crucial. And it is important to focus on quality, without overstretching for yield1.