Keep F.I.T. when walking the economic tightrope

Flexible, Income, Themes

• Flexible in portfolio construction: Investors should consider utilizing the full spectrum of available asset classes for portfolio construction. This includes utilizing assets with low or negative correlation to risk assets, such as government bonds and alternative assets. Investors should also be benchmark-agnostic and utilize derivatives and long/short positions to manage volatility, whenever possible. 
• Income generation: Low cash return in Asia signifies income remains crucial. Fixed income is a staple. High beta asset classes could see income play a bigger role in contributing to total return. High dividend equities and alternative assets, such as infrastructure and real estate, can also help. 
• Themes for long-term investors: Long-term investors can take advantage of a number of longer-term growth themes. Negative-yielding debt is likely to rise in scale, forcing global institutional investors to take on a broader range of risks in fixed income, such as duration risk, credit risk, currency risk and liquidity risk. For equity investors, developed markets offer technological developments such as renewable energy, artificial intelligence and biotechnology. In Asia, the rise of the middle class remains the best source of long-term opportunities. Active selection will help uncover these opportunities.

Asset class implications

• Equities: Stable dividends and reduced vulnerability to the global economy remain key to equity investing in 2020. Meanwhile, long-term investors should consider attractive opportunities to build a position in long-term structural growth themes. 
• Fixed income: Falling rates and the growing size of negative-yielding debt could push investors toward U.S. government bonds (long duration), asset-backed securities, high-grade corporate debt and emerging market (EM) fixed income. Investors should heed any potential decline in market liquidity during episodes of risk-off. 
• Alternatives: Investors, where possible, can explore alternative assets, such as real assets, including infrastructure and transportations. These assets have low, and sometimes negative correlation with risk assets, as well as provide a stable income over the economic cycle. 

Economic overview

• Global economic growth may shift to sub-trend in 2020. Trade tensions and geopolitical uncertainties continue to keep corporate investment weak. Although this could be partly offset by resilient consumer spending, softer job growth could undermine consumers’ confidence later in the year. Still, a recession can be avoided in the U.S. with low rates and few excesses in the economy. Come 2020, China’s gross domestic product (GDP) growth could dip below 6%. 
• Since many major central banks have taken pre-emptive action to cut rates in 2019, they could choose to stay put at least through 1H 2020, notably, the U.S. Federal Reserve (Fed). Central banks in Europe and Japan are limited by how much they can realistically cut rates and expand asset purchases. Nonetheless, global policy rates are likely to see further downside in the medium to long term.
• Asian central banks and governments have more room to cut rates and increase spending, and this could help support growth. Global trade will likely remain lackluster, but the rollout of 5G could provide some modest relief. 
• Oil prices could spike with geopolitical tensions in the Middle East, but weak demand growth and the availability of alternative supplies should keep prices in an affordable range. Gold could benefit from lower yields. The U.S. dollar (USD) may struggle to strengthen further. 

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