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Strategic Asset Allocation ─ Strategically Capturing Investment Opportunities via Flexible & Balanced Approaches

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Strategic Asset Allocation ─ Strategically Capturing Investment Opportunities via Flexible & Balanced Approaches

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The deteriorating debt crisis in the eurozone, mixed economic data in the U.S. and an economic slowdown in China have all contributed to recent market volatility. However, investors should not miss out on industries or regions of long-term investment value due to this short-term volatility. As investment guru Warren Buffett famously put it, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” ─ the market is admittedly unpredictable, but where there is a crisis, there are opportunities. Investors may balance risks and returns via strategic asset allocation, that is by diversifying their investments into different asset classes, industries and regions in light of their life stages and financial objectives. Below are some investment opportunities in different approaches for consideration.

 

Risk-balanced Approach

Emerging Asian Bonds

Emerging Asian BondsAs a result of the European debt crisis, the sovereign ratings of some European countries have been lowered by rating agencies with a negative outlook, indicating possibilities for further downgrading. In contrast, the sovereign ratings of some Asian countries, Indonesia and the Philippines among them, have been raised, reflecting steady improvement in the financial condition of these countries. The comparatively high prevailing interest rates in emerging Asian countries and their easing inflationary pressure leave greater room for interest-rate cuts compared with their American and European counterparts, and any interest-rate cut would bolster bond prices. However, given the higher volatility of the stock, bond and currency markets in emerging countries compared with those in developed markets, any negative development such as a slowdown in global or Asian economic growth and mild recession in Europe would result in weaknesses in Asian credit markets and currencies.

 

U.S. Treasury Inflation-Protected Securities

U.S. Treasury Inflation-Protected SecuritiesThe recent craze for iBonds issued by the Hong Kong Government has drawn investors’ attention to inflation-linked investment products. Another alternative could be U.S. Treasury Inflation-Protected Securities (U.S. TIPS), a bond whose principal and coupons are adjusted in conjunction with the Consumer Price Index and whose returns have a relatively lower correlation with other assets. On the maturity date, investors will receive the adjusted principal or the original principal (whichever is higher), which will protect the investors’ principal from depreciation as a result ofdeflation. However, investors should be aware that their principal and their coupon payment may also decrease if the Consumer Price Index falls, and the key risk is whether the investor’s inflation outlook differs from what inflation actually turns out to be.

 

Balanced Approach

Emerging Markets Infrastructure

Emerging Markets InfrastructureBrazil will host the World Cup in 2014 and the Olympic Games in 2016, while Russia will host the Winter Olympics in 2014 and the World Cup in 2018. In order to accommodate the needs of these huge sports events,these two countries have earmarked hundreds of billions of US dollars to develop their infrastructure. In addition, other emerging countries are also focusing on improving their infrastructure with a view to achieving sustainable economic growth and urbanisation. Therefore, the outlook of the infrastructure sector in emerging markets remains rosy as a whole.

According to Macquarie Investment Management Limited and Bloomberg, emerging markets infrastructure sector generally provided higher returns along with lower volatility compared with other major EM indices and asset classes over the last 10 years as of December 31, 2011. However, investors should be aware of policy risks as well as the risk involved in concentrated investment in one single industry. Investments in the infrastructure in emerging markets would inevitably be affected if any negative event were to occur that affects the global infrastructure industry.

 

Aggressive Approach

Asian Small Caps

According to Bloomberg, the cumulative return of Asian small caps over the last 10 years as of March 31, 2012 has outperformed large caps by more than 41 percentage points, with strong potential for future growth. Take smart phones and tablet PCs as an example, which have become the most sought-after pieces of internet-related technology around the world in recent years. High-tech supply chains in Taiwan and South Korea and middle- and low-end smart-phone manufacturers and related component suppliers in South Korea and China have acquired considerable investment appeal. Another highlight of growth in Asia is the consumer sector, where emerging industries have enabled small companies to bring their growth potential into full play. Nevertheless, when it comes to business operation, small companies may not be able to survive an economic downturn due to inadequate economies of scale, higher costs of borrowing, logistics, marketing and production compared with large enterprises. In addition, as South Korea and other Asian countries rely heavily on crude-oil imports, a surge in oil prices would also hamper their economic growth.

Global Equity

There are still some overlooked investment opportunities of substantial potential in the market despite the uncertainty of the global economic outlook. Emerging markets in general are being favoured, because they have two or three times greater GDP growth rates than the developed markets, along with attractive valuations. Investors may look at quality companies with proven track records and excellent management teams. In developed markets, investors may look at enterprises that are undergoing transformation. Brazil and India are considered favourable, the former having abundant hard commodities and oil reserves but without excessive consumer borrowings, while India enjoys an advantageous population structure. However, the global market may continue to be clouded by such uncertainties as the deterioration of the European debt crisis and the slowdown of China’s economic growth.

 

Important Notes: The above information provided is for reference only and should not be relied upon as an investment advice or regarded as substitute for any investment advice. Investment involves risks. Investors should not only base on this material alone to make investment decisions and should read the offering document for details, including the risk factors, charges and features of the product. This material has not been reviewed by the Securities and Futures Commission (SFC).