Marc Van de Walle
Remember the word ‘un-investable’ that became the catchphrase associated with financial assets in China last year as they ploughed new lows amid economic and regulatory uncertainty? Or how investors were avoiding global stocks and bonds as both fell more than 10 per cent for the first time on record?
Global stocks and bonds are up almost 20 per cent and 10 per cent since those lows in October, while Hong Kong stocks and Chinese High Yield bonds have gained more than 50 per cent, outperforming most asset classes. Investors are now scrambling to price a U-turn in China’s economic prospects this year.
Less than a month into the ‘Year of the Rabbit’, this spectacular bounce reminds us of some of the golden tenets of long-term investing.
First, always stay invested, disregarding the noise, because markets can be unpredictable, confounding the best of forecasters. History teaches us that time in the markets is more important than timing the markets, but we often forget to practise it, especially when the going gets tough. Those who panicked and sold financial assets last year – and this includes a vast swathe of institutional investors – perhaps not only did so accepting some losses, but they now also must scramble back into the market, re-entering at much higher price points. Staying in the market does not mean taking on more risk than we are willing to stomach; it means staying exposed to various asset classes commensurate with our individual risk appetite.
This is best done through a diversified portfolio which reflects our personal risk tolerance.
The second lesson is beware of (and thus benefit from) human biases, especially negativity bias, which is often a close cousin of recency bias. As human beings, our brains are wired to flee at the sight of danger. So, when the going gets rough, our instinct is to cut and run.
This clearly hit Chinese assets hard last year as the country’s tight mobility restrictions contrasted with a gradual normalisation of global activity as the world came out of a once-in-a-century pandemic. This contrast fed the negativity bias among investors about China’s economic outlook. Yet, in hindsight, this was the best time to add to Chinese financial assets as they went on sale, trading at near-record discounts to the rest of the world.
The third lesson is staying disciplined as an investor. This tenet sounds simple, but I know from my years of experience working with clients that it is hard follow. It encompasses the whole life cycle of financial decisions, starting from planning and portfolio construction, to review and the occasional rebalancing, if the portfolio goes off balance due to unexpected events and is no longer positioned to meet our long-term objectives.
It would be an understatement to say that we have experienced highly unexpected events in the past three years: a once-in-a-century pandemic, the first all-out war in Europe since World War II and a first-ever 10 per cent plus drop in both global stocks and bonds in a calendar year. These events have no doubt shaken the confidence of the most courageous amongst us.
However, these are the times when following a disciplined approach can help us make sound financial decisions, enabling us to bring our portfolio back on track to meet our long-term financial needs and goals.
2022 was an unusually challenging year for investors, with both stocks and bonds hit by soaring inflation and a robust central bank response to tame it. As investors rebuild their portfolios in the Year of the Rabbit, we believe they have at least one option which is likely to deliver positive returns – i.e., bonds and other income assets which now offer close to the highest yields in a decade.
This is especially so if inflation continues to decline and the US and Europe both go into a recession as we expect. The Fed and the ECB would then be forced to cut rates by the second-half of the year. Meanwhile, we should also be positioned to take advantage of the tailwinds from a likely strong economic recovery in China.
We have tried to capture these emerging risks and opportunities in our investment theme for the year, ‘Playing SAFE’, where:
S stands for “securing your yield” through high quality bonds and other income assets which are likely to do well as the US and Europe likely head into a recession;
A stands for “allocating to long-term value”, especially found in Asian equities and Asian USD bonds which are also likely to benefit from China’s economic reopening;
F stands for “fortifying against further surprises” by diversifying investments across asset classes and regions and allocating a portion of assets to cash and safe havens such as gold; and
E stands for “expanding beyond the traditional assets” into alternative investments such as hedge fund strategies and private credit.
Markets will almost certainly surprise us, this time perhaps positively! For instance, China’s growth could significantly beat consensus estimates as three years of pent-up demand and savings are unleashed.
Investors who follow a disciplined approach, reposition their diversified portfolios to bring them back to their desired objectives and garner the resilience to stay invested, ignoring the noise, are likely to be well rewarded.