Some signs of higher inflation in the US have worried bond investors, while equities investors are concerned about the state of market valuations following the latest phase of bull market.
In view of this, Andrew Milligan, head of global strategy at Aberdeen Standard Investments tells Citywire Asia how investors can best capture the opportunities that markets offer tap amid increased volatility in the market.
For equities, Aberdeen Standard favours Japan and selected emerging markets equities, and to a lesser extent the US and Europe, Milligan said, adding that Brexit uncertainty can weigh on UK equities.
For fixed income, Milligan said the firm favours emerging market local currency debt, where spreads look to provide adequate compensation for investment risk, even if growth in China is constrained.
The group is, however, ‘neutral to underweight’ in most government and corporate bond markets, he added.
Although underlying inflation trends remain moderate, central banks continue to expect a pick-up in headline inflation into 2018 as unemployment declines, Milligan said.
On this basis, more central banks are considering tightening monetary policy through withdrawing QE or actual rate increases, he added.
What's more, it is very likely that the Monetary Authority of Singapore or central bank is probably going to tighten monetary policy sometime this year, according to Alvin Ong, fixed income portfolio manager for Singapore bonds at Manulife Asset Management (Manulife AM).
He said this should underpin the stability of Singapore dollar bond market, and Asian credit fundamentals will remain relatively robust this year.
Asian investment grade corporates continue to deleverage while credit ratios for Asian high yield have stabilised, he said, adding that Manulife AM is ‘pretty constructive’ on high quality Singapore bonds.
On commercial real estate asset class, Milligan shared that Aberdeen Standard has taken steps to neutralise its positions across all the major regions.
He said although global property remains an attractive asset class in a world of moderate growth, valuations mean that the bulk of the future return should come from rents.
Among the major currencies, Aberdeen Standard holds a ‘small overweight’ position in the Japanese yen, is ‘neutral’ in the euro and the US dollar, and favours a ‘small underweight’ position in sterling.
Milligan said this partly reflects cross-border capital flows, valuation measures, and at the same time act as a diversifier.
Citing an example, Milligan said the yen usually benefits when investor uncertainty falls and provides protection due to its characteristics as a longer duration asset.