By Emily Lai
Both equity and fixed income markets have faced severe turbulence in the past months. The MSCI World Index fell 12% in 3 months and the MSCI Europe ex UK Index saw a drop of 13% in the same period. On the other hand, uncertainty is also increasing in fixed income market. The Fed’s inaction in September has led the market to more worries as to when the first rate raise would be, while the relatively low yields do not work as a risk premium.
Sonja Laud, Head of Multi Asset Income Global Multi Asset Group at Baring Asset Management, believes multi asset income investing is a potential solution to the excess uncertainties in the markets.
Diversification across regions
China has been the heart of the fear right now; the slowdown in GDP growth, depreciation in currency and slump in manufacturing have all generated negative impacts on the wider value proposition of emerging markets.
Laud believes regional markets are particularly affected as they heavily rely on exporting commodities to China. She is taking a defensive stance towards the region and would prefer investing in developed markets and companies.
She recommends finding income opportunities in Europe. Although developed Europe is still affected by the slowing down in China, Laud believes the strong domestic consumption in Europe can compensate for the loss; and that the domestic consumption is a strong story supported by improving labour markets, lowering oil prices and growing consumer demands.
Another choice would be Japan and Laud believes Japanese equities will help capture the best income opportunities. She finds positive grounds for upside in the market based on the corporate governance reforms and stewardship code on principles for responsible institutional investors leading to strong earnings recovery. She recommends a long term view and not to be overly swayed by the short term pressure its central bank currently faces.
Diversification on asset classes
Equity markets are having more volatility than investors would like to see. To balance out the risk, Laud suggests investing outside the traditional asset classes. She is confident and is keeping a modest allocation on real estate investment trusts and property, while holding high yield debts, local government high yield bonds and so on for diversification. BM
Here is the asset allocation strategy at Barings as of 23 September 2015: