- Prices of major asset classes have been fluctuating notably in the first half of 2019 and market volatility could persist in the near term. Volatility management is key as investors navigate in the second half.
- In an uncertain market, a multi-asset strategy with a fixed income bias could help cushion volatility of some risk assets.
- Hunt for “quality” fixed income sectors that are less correlated to the broad market and are supported by sound fundamentals.
In the blink of an eye, we are already halfway through what has been a relatively eventful 2019.
What happened in the first quarter of 2019?
In the first quarter, risk assets found support from the US Federal Reserve’s dovish pivot to a more accommodating monetary policy. Trade tensions between the US and China also eased after US President Donald Trump postponed a deadline on tariff increases on expectations of a major breakthrough in trade negotiations.
Then, some headwinds emerged in the second quarter
Sentiment turned sour in May after a stand-off in US-China trade talks. The US announced on 5 May to raise tariffs from 10% to 25% on US$200 billion of Chinese exports, and China retaliated by raising tariffs on US$60 billion of US goods, and both of these increases took effect 1 June.
Volatility management is key
Prices of most asset classes have been fluctuating notably in the first half. As shown in the chart below¹, annualised volatility of most asset classes in the first five months of this year is higher than the annualised volatility for the full year of 2018.
As stocks and bonds have become more volatile, and this could likely persist in the near term, volatility management is key as investors navigate the second half.
Annualised volatility of different asset classes (%)
Mitigate volatility with a conservative multi-asset strategy²
Volatility could lead to asset price fluctuations but also presents investment opportunities. While risk management has become increasingly important, investors could continue to seek return and income via multi-asset strategies.
Amid market uncertainties, a multi-asset strategy with a fixed income bias could help cushion volatility of some risk assets as fixed income, while still carrying some risks, is generally considered a more conservative asset class compared with equities.
In the chart shown³, a 20/80 equity and bond mix demonstrates volatility lower than a pure equity portfolio while delivering returns comparable to these single-asset portfolios.
Go for quality assets within fixed income² to add resilience
Fixed income is a broad universe covering a range of different sectors. In addition to traditional sectors such as government bonds and investment-grade corporate bonds, fixed income also includes non-traditional names such as securitised debt.
Beyond government bonds…
When investors think of fixed income sectors with high credit rating, government bonds usually stand out. But that's not all. Agency securitised debt and investment-grade non-agency securitised debt are also fixed income sectors that have relatively higher credit rating. And because agency securitised debt is backed by the US government, it is generally perceived as a proxy of government bonds.
Low correlation and supportive fundamentals
Asset-backed securities (ABS) and mortgage-backed securities (MBS) are two common types of securitised debt. ABS are created by the pooling of non-mortgage loans such as auto and consumer loans, while MBS are created by the pooling of home loans. They tend to have low correlation to equities as their price movement is more related to US economy and consumption health. Currently, housing formations are high in the US while supply has declined. Consumption health also continued in the US. All these attribute to a supportive environment for ABS and MBS.
Amid heightened trade tensions and slowing global growth, investors will likely face a challenging investment environment going into the second half of 2019. A multi-asset strategy with a fixed income bias could help add portfolio resilience while delivering consistent income.