DR.CHENJIAZI ZHONG

On global equities

Volatility in global equity markets persisted in November, fears of rising interest rates, multiple trade conflicts, the end of QE, and related uncertainty about the global economic outlook weighed on sentiment and set the market on edge. Additionally, U.S. crude ended last week down 11% at $45.59, posting the worst performance since January 2016; the falling crude oil prices added to concerns.

Swiss equities have held up relatively well in the latest sell-off due to their strong tilt to defensive sectors. Although the dividend yield is attractive, as compared to other European countries, the valuation of the overall Swiss equity market is less compelling, which is well above its 10-year average. Historically, the Switzerland Stock Market reached an all-time high of 9611.61 in January 2018 and a record low of 1287.60 in January 1991. Inflation data for November seen falling 0.1% MoM and rising 1.0% YoY.

In emerging markets (EM), while corporate earnings forecasts have gone down over the past months, actual corporate earnings look to be stable and more reasonable. Additionally, the U.S. dollar has not strengthened further relative to Asian currencies. Moreover, valuations of EM equities are attractive – EM equities are around 11.5x, as measured by trailing P/E ratio, relative to 15x of their developed markets (DM) counterparts. That said, EM equities are traded at close to a 25% discount to DM equities. All these developments are modestly positive for EM equities.   

On fixed income

The fundamentals of EM sovereign bonds in USD are solid, their yield of around 7% is compelling, the carry of the EM sovereign bonds is attractive, and EM sovereign and corporate yields have widened to attractive levels. As spreads move wider, the dispersion and the risk of negative returns is likely to decrease. EM sovereign not only offers an attractive yield-duration combination but also portfolio diversification. While EM local currency posted the biggest losses, followed by EM sovereign bonds.

Hedge funds during market volatility

Hedge funds are a useful source of return and stability in a multi-asset portfolio, especially during times of market volatility. They can offer superior risk-return compared to many other asset classes and access to uncorrelated investment opportunities, which provides downside protection and diversification benefits. The current global environment of heightened stock dispersion, low cross-asset correlation, rising interest rates, moderately higher volatility, and diverging monetary and economic policies are supporting the performance of the asset class.