Asset Allocation

Jai Jacob, managing director and fund manager in Lazard Asset Management’s multi-asset investment team, creates his own asset classes because traditional subdivisions no longer suffice. Most recently, he created sustainable agriculture. He also takes a different view of emerging markets because this universe has become predominantly China, just at a time when Chinese markets are reeling. 

Equity markets in most emerging markets are lagging the US and Europe significantly this year. The reason for this is the stricter rules for listed companies in China and the continuing impact of the coronavirus. While the former is an ongoing source of uncertainty for investors, the latter creates buying opportunities, particularly in Southeast Asia.

In recent days we have seen a massive correction in Chinese stock markets, both in Hong Kong and the mainland. This was due to particularly strict regulatory measures taken by the Chinese government around education stocks.

The ninth annual Global Sovereign Asset Managers Survey, conducted by asset manager Invesco, shows that sovereign wealth funds and central banks have shifted more money into equities and expanded their investment horizons. It is also notable that, according to Rod Ringrow, head of official institutions at Invesco, many have increased their investments in China while taking ESG more seriously.

More equities

A monetary policy mistake is now a very big risk about which markets are not taking sufficient account. Tightening at the wrong time could trigger a recession. The first half of the year was very positive, but you also have to dare to take profits. Inflation will be more persistent than generally assumed. Caution is therefore advised.

Equity, bond, and mixed collective investment schemes (UCITS) have achieved annual net returns of 7.6%, 2.3%, and 3%, respectively, over the period 2010- 2019. These positive returns contrast with the 1% loss on bank deposits.

In certain sectors, the correlations between equities and bonds are turning positive (again). That is a serious challenge for asset allocators.There is usually a negative correlation between the performance of stocks and bonds. But since the pandemic, a number of sectors, such as tech, consumer and communications, have seen a positive correlation, a recent study by Fidelity International found.

One of the most important functions of a financial system is to bring together people with an abundance and a shortage of capital. Financial markets can efficiently bring innovative companies and investors together. This has a positive effect on the real economy – think of employment and competition (in the form of lower consumer prices). 

Green indices reduce the carbon footprint of investment portfolios, but their added value is currently limited in terms of managing the financial risks of climate change. Only in the event of a disorderly climate transition would there any demonstrable outperformance.  

Capital Group economist Robert Lind is a bit short on calling the current inflation surge temporary and sees faster-than-expected central bank intervention as the biggest risk to the bull market. He also has strong views on Sino-US trade relations and holding bonds in a portfolio.

Inflation uncertainty