Looking for returns in uncertain times

For now, Mr David Buckle (left) favours high-yield debt in Asia, while Mr Tim Orchard (below) feels China equities offer considerable potential if the country can successfully push through planned reforms.
For now, Mr David Buckle (above) favours high-yield debt in Asia, while Mr Tim Orchard feels China equities offer considerable potential if the country can successfully push through planned reforms.PHOTOS: FIDELITY WORLDWIDE INVESTMENT
For now, Mr David Buckle (left) favours high-yield debt in Asia, while Mr Tim Orchard (below) feels China equities offer considerable potential if the country can successfully push through planned reforms.
For now, Mr David Buckle favours high-yield debt in Asia, while Mr Tim Orchard (above) feels China equities offer considerable potential if the country can successfully push through planned reforms.PHOTOS: FIDELITY WORLDWIDE INVESTMENT

Mr David Buckle, head of quantitative research at Fidelity Worldwide Investment, and Mr Tim Orchard, head of equities for Asia ex-Japan, speak to Ariel Limabout Asian bonds and equities, the likely American interest rate hike and the effects of the Greek crisis on European markets.

Q Which bonds look more promising for investors - Asian, American or European?

David Buckle (DB) With the Western world bracing itself for an end to monetary accommodation, bond yields might be expected to rise. That is not the case in Asia, so investing in Asian bonds might yield better returns.

Q What are your views on high-yield investments in Asia?

DB In a landscape where countries are cutting rates and the economy is sluggish but not in a hard-landing scenario, that is a fantastic environment for bonds. So we are encouraging people to increase exposure there (in Asia).

In particular, I like Asian debt exposure. High-yield debt looks good, but any debt in Asia should do well. If the economy is slow but not terrible, then interest rates tend to be decreased (which lowers yields) but defaults don't increase - hence the attractiveness of high-yield debt.

SEPARATING EQUITIES AND ECONOMY

I think it's worth thinking about in the context of why we're worried about Chinese GDP growth so much with relation to the stock market. The two don't necessarily go together.

MR TIM ORCHARD, head of equities for Asia ex-Japan, Fidelity Worldwide Investment

Q How are changes in China affecting the country's equity market?

Tim Orchard (TO) The authorities continue to walk this tightrope between reform on one hand and rebalancing the economy away very gradually from fixed-asset growth and towards consumption (on the other). I think our view is that they absolutely understand how to do that. It's about creating a social security system, which means that the consumption function changes, the savings ratio comes down, people are more prepared to spend money.

You can see here slowing gross domestic product (GDP) growth; investment as a percentage of GDP has started to fall away.

I think a lot of people agonise over GDP growth in China. I understand there needs to be a certain rate of growth, but people are too focused on that.

And I will just draw your attention to... some work that was done at the London Business School. There's a slight inverse relationship between stock market returns and GDP growth.

I think it's worth thinking about in the context of why we're worried about Chinese GDP growth so much with relation to the stock market. The two don't necessarily go together. When times are booming and countries are developing - partly because of corporate governance, partly because growth is so high - equity is not often seen as a scarce resource, which it should be. I think, as things tighten down, as corporate governance improves, as countries become more mature, you tend to find equity being slowed down, you tend to find equity being treated as a scarce resource a little bit more.

Q What advice would you give to Singapore investors interested in Chinese equities?

TO Reform and governance will be the key to returns in the Chinese equity market over the medium term. Investors need to determine whether they think that rebalancing the economy away from fixed-asset investment and towards consumption can be achieved, alongside improving corporate governance at the micro level. If this can be achieved, then investors are likely to benefit from outsized long-term returns.

Q When will the United States Federal Reserve raise interest rates?

DB An accommodative policy is there to try to get an economy back to full employment - that improves wages because low interest rates exist; consumers will spend that money rather than save it. That boosts the economy and you have a positive cycle. That will go on indefinitely until there's so much consumption, it generates inflation.

So the key point for the Fed right now is: What is inflation? At the moment, inflation is lower than the target. It's below target and not rising. So for that reason, the Federal Reserve can afford to be patient. Our expectation is that the rate rise is going to come in December.

In particular, you don't want to be too early with a rate rise in this environment, because you'll just choke off the recovery.

The problem the Fed has - the reason why it's being a little later - is the oil, I think. And in fact what we've seen in the US is that the consumer has seen this drop in oil and hasn't viewed it constructively. Consumers haven't spent more at the shops - instead they've saved money. Since the oil price dropped, we've just had a large increase in the rate of saving - no major increase in consumption. For this reason, we think that the Federal Reserve is going to be later.

What's going to be important to the environment here is that we need to see wage rises. We see none today. If we have inflation without wage rises, the Federal Reserve will probably look through that.

Q How do you expect the Greek crisis to affect European markets?

DB In a nutshell, contagion through the banking system isn't expected, but there could be financial market turmoil. European bond markets except for Greece look fine to us.

A version of this article appeared in the print edition of The Sunday Times on July 19, 2015, with the headline 'Looking for returns in uncertain times'. Print Edition | Subscribe