Applying the “three lines of defense” in multi-asset income
Facing volatile markets and lower rates, how can investors seek yield while managing risk?
Cash is often perceived as a safe haven, a “risk-free” option that provides liquidity to a portfolio. Still, cash is low-return and may lag the rate of inflation, curbing investors’ chances of achieving their financial objectives.
In most Asian economies, cash’s real return (after taking inflation into account) has been low, as shown in the chart below.
This year, the global economy is showing positive growth, albeit at a slower pace compared with 2018. Investors are also more mindful of downside risks to the global economy, and this could increase market uncertainties. In a late economic cycle where the equity market is volatile, there are other asset classes, beyond cash holdings, that investors can explore.
The bond market can offer a relatively more attractive return compared with cash. Taking reference of the monthly return data since end-2002, the annualised total returns2 of US bonds, Asian bonds and emerging market bonds were higher than that of cash.
The US Federal Reserve is looking likely to raise its benchmark interest rate two times this year, versus four last year, creating room for fixed income performance to improve in 2019. Meanwhile, the provision of regular coupon may also help smoothen the return proposition for a combination of fixed income assets.
Nonetheless, investors should stay vigilant as they look for income. Investors could adopt an agile approach marked by diversification among different types of fixed income assets as market cycles evolve. They can review their investment portfolios regularly and make adjustments according to financial goals and risk appetite3.
Download Market Insights Publication: The Year Ahead | 2019