Charlotte Wun, chief investment officer for Asia at RBC Wealth Management in Hong Kong, gives her perspective on current market conditions and investment opportunities. Q. Inflation is rising despite a weak global economy. What should Asian investors do to protect themselves? A. There are a number of ways to hedge inflation. One can buy inflation-linked bonds such as Treasury Inflation-Indexed Securities and iBonds. The Hong Kong government issued iBonds in July of last year with a coupon linked to the consumer price index over the last six months. The performance of iBonds in the secondary market has been very good, and the Hong Kong government is going to issue a second iBond soon. And, of course, real estate remains strong as a traditional tool for Asian investors to hedge inflation. Q. Oil prices seem to have regained their footing, and as they rise they are likely to affect many Asian economies. What does this mean for investors? A. Asian investors have to closely monitor the recent rise in oil prices as higher oil prices still have the ability to disrupt the rally in equities. Year to date, oil prices have risen 6.27 percent, while the world MSCI equity index gained 10.8 percent. Investors generally believe that global growth — as seen through positive data from the United States and China — and liquidity driven by quantitative easing were behind the recent rally in oil prices. However, the situation could still change for the worse if the continued rise in oil prices carries over to other key components of the C.P.I., like food prices. The model run by the American financial analyst Gary Shilling shows that the rising inflation of the late 1960s and 1970s was devastating to both stocks and bonds. Q. Where do you advise clients to have the bulk of their assets right now? A. We believe equities are still attractive. We expect a further upside move of around 10 percent for the equity market. This is based on our assumption of a three-percentage-point contribution from earnings, with the remainder coming from higher price-earnings ratios. In our opinion, however, higher stock prices start with events that can shift confidence and/or reduce uncertainty, or with economic factors. As such, we view the accommodative global monetary policy settings, higher growth expectations and the associated decline in risk spreads as the key catalysts for further P/E multiple and share price gains over the next six to nine months. Q. Which equity markets do you favor in Asia, and why? A. Our preferred markets are China, South Korea and Taiwan. Both China and South Korea are trading at single-digit price-to-earnings ratios, while Taiwan will most likely have the highest earnings-per-share growth, of 23 percent, but from a low base in 2011. In terms of sector preference, we like information technology and consumer discretionary industries. Among major Asian export products, automobiles, smartphones and tablet devices are bright spots. The technology cycle is likely to bottom out in the next couple of quarters, presenting major investment opportunities. Q. And on the fixed-income side? A. We believe there are significant upside risks to bond yields. It will be hard for yields to move substantially lower from here unless the feared collapse of the euro zone becomes a reality, whereas the scope for eventual increases is much greater if the crisis fades and growth in Europe resumes. Q. Where do you see the best investment opportunities? A. While this would all hinge on the risk profile of individuals, our recommended asset allocation is to modestly overweight stocks and underweight bonds for a balanced profile. Our overweight stance in equities is modest in light of the fluid situation in Europe and an unusually wide divergence between the potential outcomes of the crisis. In the currency market, we believe the U.S. dollar will strengthen against the euro but weaken against most Asian currencies, like the Singapore dollar or the Chinese renminbi. We recommend that investors have some exposure in these Asian currencies.
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