'Dividend aristocrats', EM bonds key strategies in 2020 for conservative investors: BNP Paribas

Singapore

WITH bond yields depressed and a moderate earnings recovery expected in 2020, BNP Paribas is advising conservative investors, who tend to allocate a bigger proportion of their portfolio to fixed income than equities, to accumulate "dividend aristocrats".

These developed-market stocks, which have increased payouts in each of the past 25 years, historically offer better-than-average risk/return compared to other equities.

They also provide protection against inflation if it were to rise.

But BNP Paribas' recommendation comes with a caveat - investors must be willing to accept the higher volatility of equities and go in long term, it said in an investment outlook report.

These dividend plays also trade above historical averages but given the modest upside potential of equities due to higher profit margins, payouts are likely to play a major role in stock returns in the coming years, BNP Paribas said.

While Singapore equities are not classified as "dividend aristocrats", the bank is overweight on the market with lenders and property-related listings offering attractive dividends.

"The Singapore market underperformed last year compared to North Asia and valuations are still attractive, together it provides opportunities to capture yield," said BNP Paribas Asia chief investment officer Prashant Bhayani at a media briefing on Tuesday.

The wealth manager has also suggested other equity strategies for those who have a more conservative risk profile.

This includes sticking to quality names globally that have high profitability, low gearing and stable profits.

However, such investments might not bear fruit in early-2020 due to high valuations and a recovering global economy, which is likely to see cyclically-sensitive equities post stronger gains.

That said, BNP Paribas expects volatility in markets to increase as the year progresses, which is beneficial for quality stocks.

"In the longer term, quality stocks that have strong balance sheets, less variability in profitability and high free cash flows still make good long-term buys at this point of the cycle," Mr Bhayani said.

A potential widening of credit spreads would increase the attractiveness of quality stocks, he added.

Another strategy advocated by BNP Paribas is for conservative investors to seek low-risk yields in fixed income.

For short-term plays, US government bonds are favoured along with Asian investment-grade credit.

Among longer-duration bonds, emerging markets are an attractive proposition for investors.

"This asset class is supported by the search for yield as developed countries offer only low or even negative yields," BNP Paribas said.

It is advising clients to pick up hard-currency corporate bonds like those denominated in US dollars.

Local currency-denominated government bonds are also favoured with the wealth manager of the view that emerging-market currencies are undervalued, making currency risk small.

The focus among higher-yield bonds is also on emerging markets, but with a preference for high-quality issuers in their base currency like Chinese property firms.

"Chinese bond defaults may be increasing, but are still below 2 per cent. What this means is credit selection and bottom-up analysis will be key," Mr Bhayani said.

He added that with the rate of China's slowdown decelerating and the effect of fiscal stimulus and monetary policy easing being felt, property developers should benefit from the support.