Adjust expectations as equity returns are low, investors told

WITH stock-market returns being moderate for the foreseeable future because of low inflation, investors should be realistic in their expectations, an investment strategist has advised.

Bill Maldonado, chief investment officer (CIO) for the Asia-Pacific in HSBC Global Asset Management, said: "Over the next decade, you can expect equity returns of about 6 per cent - real return on top of inflation."

Globally and regionally, inflation is not a problem and will be fairly subdued, as growth is still below trend, said the Hong Kong-based CIO, who was recently in Singapore to meet his institutional clients.

Economies have excess capacity and that means interest rates are likely to stay lower longer than many are assuming, he said.

"In that context, asset allocation is very challenging. Returns will be moderate. In a low-inflation world, 6 per cent is okay," he said.

Of course, in any given year, returns can be very high, or negative, but an average return is very different, he noted.

Mr Maldonado, who is also the strategy CIO for equities, said: "We're saying it's very difficult to give solid reasons to deviate from average returns."

Last year, the Dow Jones Industrial Average closed up 26.5 per cent, its biggest gain in 18 years. But it has barely moved since the beginning of the year.

"We're living in a much lower return world; people need to adjust expectations," said Mr Maldonado.

Those who want much higher returns must be prepared to take on significant risks, such as by using more leverage.

Investors remain cautious though they are regaining their risk appetite and ready to invest, he said, adding that there were good companies in the region, especially in North Asia, particularly those dealing in consumer durables and financials.

He is less positive on Asean markets, which have more defensive type companies such as utilities, healthcare and consumer staples, because they are overvalued.

Geoffrey Lunt, HSBC Global Asset Management's director and senior product specialist for fixed income, said that with fixed income, Asian bonds continue to be a good bet.

The Asian local currency bond market has posted a positive return every year since 2001, except last year, when it was down 5.7 per cent, based on HSBC Asian Local Bond Index in USD terms.

This year, it is showing a turnaround, up 1.9 per cent so far.

Asian currencies which experienced sharp volatility last year, mostly due to liquidity concerns as a result of quantitative easing tapering, have performed better this year.

Asian bond markets are severely under-represented, although they are high-quality and higher-yielding, said Mr Lunt.

Despite the clear economic importance of the region, Asia ex-Japan bond markets represent less than one per cent of the world government bond index.

Asia has a significantly lower default rate of 1.10 per cent; the rate in the emerging markets of Latin America and emerging Europe is 4.93 per cent, but yields are at similar levels - almost 8.0 per cent.

Bond investors should start paying attention to RMB fixed income, he said.

Although the RMB onshore bonds are restricted to foreign investors, the rapid internationalisation of the Chinese currency will soon lead to access, he said.

"The Chinese onshore bond market is the third or fourth largest in the world; it's on the verge of opening up. There'll be valuable opportunities for investors to access the market," he said.

The world government bond index does not cover China now. If we include the Chinese onshore government bond market, it would account for around 13 per cent, he said.

RMB bond yields are high and will go even higher as China's capital market opens due to sheer demand, Mr Lunt said.

The yield of non-government offshore RMB bonds of 2 1/2 years duration is just under 4.5 per cent, according to the HSBC Asian Local Bond Index. The Merrill Lynch US Corporate Index has a yield of 2.96 per cent and a duration of 6.79 years. The Merrill Lynch Euro Corporate Index has a yield of 1.58 per cent and a duration of 4.61 years.