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Inflation, which is not supported by economic growth, will still erode asset values. Investor should get prepared early to protect purchasing power and add value to the investment portfolio in the face of inflation.

The Current Inflation Is Different From the Past

In the past, accelerating economic growth pushed up the demand and subsequently prices, spurring the demand-pull inflation. However, the inflation that we are seeing this time is driven by the overflow of market liquidity, which was constantly injected by central banks in the previous years. The real economic growth has not yet caught up. The easing policies in the preceding years altogether pumped more than US$10 trillion1 into the market. To make the situation worse, the pandemic had substantial disruptions on global supply chain, which caused a huge demand-supply imbalance. Together with the increased labour and transportation cost, price level was pushed up, further intensifying the inflation. The global markets released a huge amount of capital to give support to the market in the past two years; the tight supply chain cannot be resolved in a short period of time; the development of the pandemic is also unknown; countries do not have concrete plans to tighten the monetary policies. It is therefore expected that the pressure of rising prices will hardly be eased by the end of 2022. Investors should make plans to combat inflation.

1. Source: https://www.bbc.com/zhongwen/trad/business-59385987,as of 23 November 2021.

Figure 1：GPD in U.S. vs Government Expenditure and Investment vs Private Consumption.
The growth in personal consumption has been supported by government expenditure and investment since Q2 2020, yet private consumption is yet to chase up.

Investment Opportunities Under Inflation

Although many countries have not fully recovered from the pandemic, there is gradual resumption of economic activities. Along with the increasing number of vaccinated population, employment, industrial production, retail sales and corporate earnings are expected to improve. Jerome Powell, the US Federal Reserve (Fed) Chairman, also mentioned that “transitory” is not accurate to describe the current inflation. Hence, the market expects that the end of debt purchasing and interest rate hikes will happen sooner, and lowered import tariffs might be imposed to ease high prices. These news might urge the capital to lock in profits at high levels and switch to other markets with more attractive valuations, such as Asia.

The price-to-earnings ratio (P/E ratio) of Asian stocks is relatively low. Amongst all, the Australia stock market has a relatively strong performance. Backed by a well-developed financial system, there is huge merger and acquisition potential in this market. India is another market of focus. Since the launch of Digital India programme, digitalisation has been sweeping the country and made significant progress. Contributed by the massive growth of online consumption during pandemic, the development of local e-commerce is robust and rapid. China shall never off investors’ radar. Last year, the Chinese government implemented a series of tightening policies, which aimed to suppress the corporate over-borrowing, resulting in structural changes in fundamentals, reducing the risk of the emergence of a bubble. It is inevitable to have short term shocks, but when the market consolidation is complete, the uncertainty tends to become clearer. The economic development will thus be increasingly stable and solid in the long run. The oversold stock market offers long term investment opportunities.

Asian High Yield Bonds Are in a Sweet Spot

Generally speaking, when interest rates rise during inflation, bond prices should be under pressure. But if we take a closer look at the macro economy, we will notice bond is a subtle yet promising choice of investment, given that the pace of tapering is affected by actual economic recovery and the emergence of the omicron variant. Asian high-yield bonds provide higher yields and shorter durations as compared to its peers. Hence, when interest rates rise, these bonds are more resilient and higher yields can help increase the real return. Institutional investors have always employed bonds as a primary tool for diversifying investment portfolio risks. However, there are many types of bonds and strategies, and a professional investment team is often the key to success.

Mixed Asset Strategy To Grow Wealth

Conservative investors often take advantage of the upward trend of interest rates to preserve wealth during inflation. However, the current interest rate level is at a record low. Even if we are entering the interest rate hike cycle, it is still difficult to offset the impact of inflation. General precious metals are also a traditional option to fight inflation. However, high entry fees, limited trading channels, and low liquidity might make the asset class less appealing, especially for retail investors. A hybrid investment solution comprised of both equities and bonds, in particular the portfolio covering the Asia-Pacific region, is therefore worth considering for combating inflation, with its flexibility and lower cost.

As aforementioned, Asian equity and bond markets are full of opportunities. Sector rotations and dynamic geopolitics are favourable, such as electric vehicles which are undergoing structural growth, Australian commodities, Indian iron and steel, solar and hydrogen supply chain etc. In terms of bonds, the asset class can help diversify the overall risk and increase dividends in the portfolio. Considering the sufficient cash flow and strong debt repayment capabilities, the performance of Indian and Indonesian commodity bonds will remain strong.

To formulate an effective mixed asset portfolio and maximise the advantages of mixed asset classes, an investment team’s extensive experience and professional judgement are crucial. Through a unique set of risk assessments, in-depth analysis of various assets, strict selection of equity and debt securities and proactive management, BEA Union Investment has successfully captured the Asian market opportunities over the years, leveraging our local expertise in Asian investment. Our outstanding performance has won numerous awards, which is a testimony from the industry.

BEA Union Investment Flexibly Allocates in Asia Stocks and Bonds

Sail Through Inflation with a Mixed Asset Investment Strategy

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