Safe-haven sentiment to shape allocations in new era

Amid the continued twists and turns in both the macro regime and market landscape, investors need to take a nimbler and more dynamic approach to asset allocation in the coming months.

Broad expectations for 2024 include higher-for-longer interest rates in the US, yet more accommodating monetary policies in Asia. As a result, navigating what is widely believed to be a divergent, volatile and geopolitically-tense landscape ahead should make it an interesting year to be more active.

Rather than remain in cash to capitalise on high rates, or stick with a concentrated group of US stocks, investors are more likely to opt for selective exposure to tailwind sectors and names in China, Japan and India. At the same time, high-quality and safe-haven assets – including gold – should become more attractive over the next six to 12 months, encouraging more meaningful allocations from low levels.

These were some of the takeaways from a recent webinar, hosted by AsianInvestor and State Street Global Advisors, on rethinking allocations for a new reality, based on the views of several market specialists:

• Priyanka Kishore, founder and principal economist, Asia Decoded
• Gareth Nicholson, chief investment officer and head of discretionary portfolio management, International Wealth Management, Nomura
• Robin Tsui, APAC gold strategist, and SPDR gold sales specialist for Hong Kong, State Street Global Advisors
• Jaspar Crawley, head of institutional investor relationships, APAC ex-China, World Gold Council

Their views reinforced findings from an AsianInvestor poll of investors in Hong Kong and Singapore that was conducted before the webinar – already highlighting a preference for quality and safe-haven assets.

Findings showed long-term capital growth would be the main driver of allocation decisions for the next six to 12 months for almost half (47%) of investors, much more than the 24% seeking portfolio diversification. By asset, investment grade (IG) credit was the most appealing for 43% of investors over the next three to six months, followed by gold (24%).

Put simply, doing nothing is no longer an option.

• Read more insights below
• And watch the on-demand version here

KEY INSIGHTS

Preparing for a weaker US growth outlook

Priyanka Kishore
“An outstanding feature of 2023 has been US growth resilience to a sharp hike in rates as well as the ability to bring down inflation without meaningful weakness in the labour market. However, this has brought us to a fork in the road for the US economy. I believe a soft landing is more likely for 2024, with inflation meandering back towards the Fed’s target level without negative growth rates.”

Gareth Nicholson
“The US economy is taking on an increasing amount of debt. Apart from the two wars the country is involved in, infrastructure spending is needed and will likely rise in the coming election year. But the US is still a global safe haven, and we foresee rates remaining high for most of 2024. Overall, we expect a soft landing, which will put pressure on duration-sensitive stocks such as US growth equities.”

Asia set to drive the global economy

Priyanka Kishore
“Closer to home in Asia, domestic factors – rather than the Fed – have influenced the rates outlook. On average, Asian central banks have hiked 250 basis points less than the Fed. Asia will likely move more quickly to a rate-cutting cycle in 2024 as inflation declines. Saying this, the divergence in inflation in the region will be reflected in the rate cutting.”

Gareth Nicholson
“Based on our expectation of a soft landing in the US, we are tilting towards Asia, where monetary policies are a lot more accommodating. Japan and China are in different stages and inflation is falling. This is the time to reduce allocations to US equities and fixed income, in favour of Asia.”

An uncertain short-term future for China

Priyanka Kishore
“The debate over China is based on how much of a slowdown will we see in 2024, which will mostly depend on policy support. Consensus for real GDP growth is 4.5%. Structurally, China is getting less bang for every buck of infrastructure spend given that the country’s investment-driven growth model is hitting its limit amid over-capacity in the traditional manufacturing sector. Further, rebalancing towards consumption is not yet progressing at the pace most people had expected when it was first introduced.”

“Yet it is important not to overstate the spillover to the rest of Asia. China remains an important trading partner within the region, but is increasingly less dependent on imports from the rest of Asia.”

Investing in a shifting landscape

Gareth Nicholson
“Geopolitics will become increasingly important in allocation decisions next year. Investors will need to position for where they expect to see the most stability alongside the greatest economic strength. This means US exceptionalism will be diluted, and we will see more diversification. Asia is set to benefit from this trend, both in India and Japan, and tactically in China. Beyond cash, high-quality assets such as IG bonds, securitised credit and senior loans are likely to be in high demand in the shorter term.”

Robin Tsui
“In 2023, the best-selling ETFs have been those focused on short-term treasuries, paying over 5%. A lot of investors still hold a lot of cash, ready to deploy this in 2024, or whenever they see opportunities.”

Taking a more active stance

Gareth Nicholson
“Next year should be interesting for active investors for various reasons. For example, structured products, due to higher front-end rates, should benefit from more built-in protection. Also, while valuations in China are compelling, the struggling economy means investors need to look closely for the tailwinds. Investors also need to cherry-pick sectors in India and Japan where they see the biggest growth potential, rather than broad exposure. Meanwhile, in Asia IG credit, some markets and sectors are offering too much or not enough value, heightening the need to be selective.”

Robin Tsui
“ETFs have always been a good way for investors to make active and tactical allocations, and more investors will use ETFs in 2024 for this purpose. We will likely see greater selectivity with smart beta ETFs, as investors decide between dividends and high growth equities. In addition, some of the commodity ETFs, such as gold, will see increased active allocations due to higher political risks throughout 2024 based on various elections.”

Fluctuating geopolitics pushing gold demand higher

Jaspar Crawley
“Geopolitical tensions in recent years have had a big impact on how central banks now manage their reserves. For gold, average central bank buying between 2010 and 2021 was around 450 tonnes a year. In 2022, this jumped to 1,100 tonnes, and year-to-date in 2023, as of 31 October, it was at 800 tonnes, ahead of the same stage 12 months earlier. The link between geopolitics and gold has strengthened in the past two years.”

Robin Tsui
“We have seen strong demand for gold from Asia in 2023. Japan, China and India have driven strong inflows into gold ETFs. Japanese investors, for example, have made good returns from gold denominated in US dollars when converting back to yen.  In China, currency depreciation and the need to diversify have also boosted inflows to gold ETFs. By contrast, Europe and the US have seen outflows due to rate rises, although we expect that trend to reverse in 2024.”

Gareth Nicholson
“Against the backdrop of the geopolitical ‘super cycle’, gold as a safe haven looks attractive, encouraging investors to create more meaningful allocations from low levels.”

A growing strategic role for gold

Robin Tsui
“We expect the likely pivot by the Fed, and also a weaker US dollar in 2024, to lead to more investor interest in gold. The shift in monetary policy in the US and the change in investment sentiment as well as geopolitical risks should support flows into the gold market.”

Jaspar Crawley
“Expectations of weaker US economic growth in 2024 could be positive for gold. At the same time, if Asian markets like India see faster growth, there is potential to trigger more buying of gold. There is already a strong affinity for gold in Asia, with China and India alone accounting for around 50% of annual demand in a typical year. Singapore has also been notable for adding gold significantly to its reserves recently, reaching around 4% of its total. Most private banks in Asia have a strategic asset allocation to gold, which differentiates them from their counterparts in Europe.”

Gareth Nicholson
“Gold is likely to form a strategic component of asset allocation in 2024. The questions is, how extensively will individual investors allocate to this asset within their portfolios?”