Investors advised to have all-weather portfolio amid market volatility

• Published date: 09 March 2023
• Publication title: The Korea Times

Risk assets, including global equities, had a great start in the first month of this year, only to lose some luster when the market reset expectations about a potential pivot in the U.S. Federal Reserve's rate hiking cycle after a series of strong U.S. economic data.

The latest developments reaffirm our view that investors should stay vigilant and take a defensive investment approach this year, built on our belief that the market could remain volatile, in light of crosscurrents facing the economic environment, geopolitical tensions and corporate earnings. We recommend using the recent pullback to add to select pockets of investment opportunities: Asia is one of them.

Many investors are skeptical of this call. A key reason behind this skepticism is recency bias. Excluding Japan, Asian equities had done poorly and underperformed other regions for over two years in a row. This often leads many investors to extrapolate the past years' trends into the foreseeable future.

Also, following the aggressive monetary policy tightening by the Fed over the past year, many fear that economic conditions in the U.S. will worsen, clouding the outlook of many export-oriented Asian economies.

We argue Asia ex-Japan will outperform other markets notwithstanding these challenges. Our base case assumes a mild recession in the U.S. and Europe this year, while Asia is likely to be relatively unscathed, helped by China's economic reopening and policy support. The recent strength of the U.S. dollar is more of a multi-week phenomenon than a sustained uptrend to us.

With the Fed expected to keep rates higher for longer, this will likely reignite fear about a recession sooner or later. As U.S. interest rates start to peak and real interest rate differentials compared with other markets narrow, the dollar's supremacy which has persisted for years would likely begin to turn.

This should augur well for emerging markets, including Asia ex-Japan, enticing global funds to diversify outside of the U.S. Emerging Asia, including China and Southeast Asia is one of the regions where the global investment community has been notably underweight, thereby making this market a prime beneficiary should the dollar sustainably weaken.

Zeroing in on China, we see more pro-growth policy signals emerging, with the "Two Sessions" scheduled from March 5. Following stronger-than-expected January money supply and new loan growth, the People's Bank of China injected over RMB 600 billion in liquidity via reverse repos...