Investors are now concerned with various risk factors, including the aggressive rate hikes by global central banks to curb inflation, heightened geopolitical tensions, and the resurgence of the pandemic in China. While this has made the investment landscape challenging, a flexible multi-asset allocation strategy may help address these various risk factors. Investors looking to strike a balance between reducing volatility and increasing returns may consider the Value Partners Asian Income Fund for medium- to long-term investment.

In just over a month, the US Federal Reserve has raised interest rates by 0.75%. Kelly Chung, investment director of Value Partners, said that the Fed was “a bit late” in tightening the policy, which made inflation out of control in the short term. In addition, inflationary pressures were heightened with the increasing military tensions between Russia and Ukraine, pushing up energy and food prices further. Commodity prices will likely remain high in the second half of this year due to a possible escalation of the war between the two countries, implying that higher inflation will remain. With persistently high inflation and ongoing political risks, the overall economy is expected to fall into a recession.

More favorable allocation against changes in the investment environment

In light of the higher inflation, the Value Partners Asian Income Fund has made changes in the portfolio since the end of last year. For example, Chung said that she increased the holdings of equities and bonds that benefit from higher inflation. These include some Indonesian energy and commodity sectors, which are benefitting from the country’s progressive economic recovery and tailwinds from high commodity prices. She also raised the weighting of upstream industries and companies with pricing power, as they are able to maintain profitability under the high inflationary environment. The fund also increased its holdings of infrastructure stocks in mainland China, as they continue to ride on the fiscal easing policies of the Chinese government.

Chung also remains constructive about the semiconductor sector. She expects that the chip shortage will last until the end of this year as the recent lockdowns in China have exacerbated the supply-demand imbalance. Value Partners’ investment team found that many customers continue to increase chip orders, which should provide profit visibility for semiconductor companies in the short term. With optimistic fundamentals of the industry, the fund’s top three holdings are currently all Taiwanese semiconductor companies.

On the other hand, other technology stocks are more sensitive to interest rate movement, particularly those with longer cash flow duration, despite the supportive signals released by the Chinese government for the development of the Internet sector. When yields keep on rising, those stocks will bear the brunt. Therefore, the fund currently has no such holdings amid high inflation.

Shortened duration of the bond portfolio to navigate rate hike cycle

Various regulatory measures imposed by the Chinese government on several industries last year, especially in the real estate sector, resulted in volatility among real estate bonds in China market, widening the spreads of bonds from other regions. Although Chinese authorities recently imposed favourable policies to support the real estate sector, and bond spreads possibly bottoming out, real estate bonds currently account for less than 4% of the fund’s holdings.

“Under our relatively prudent investment strategy, the proportion of real estate bonds in mainland China will be limited. Given the high commodity prices, the fund currently holds bonds mainly from industrial, energy, and commodity companies, which possess strong cash flows and sound capacity for debt repayment,” Kelly explained.

In order to mitigate the negative impacts of rate hikes and have a more stable portfolio, the investment team shortened the average duration of the bond portfolio and reduced holdings of unrated bonds in the first quarter of this year amid the uncertainties in the market. The team increased the proportion of investment grade bonds, with the average credit rating of the portfolio lifted from BB- to BB. The investment team particularly favours some short-term bonds and corporate bonds, as spreads are more narrowed with less negative impact from rate hikes on the back of their solid corporate profits and cash flows.

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The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable as of the date of presentation, but their accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you. This material has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited.