Source: Barron Weekly
Author: Lin Yidan

In July, Swiss Patek Wealth Management made an updated outlook on global macroeconomic and asset class prospects for the second half of 2023. The agency believes that in the context of continued global macroeconomic polarization, investors need to adopt more proactive investment strategies.

Chen Dong, head of Asian macroeconomic research at Patek Wealth Management in Switzerland, pointed out that the gap between global services and manufacturing industries is widening, and there is also a gap in business activity between emerging economies and developed economies. He expects global GDP to grow moderately at a 2.6% growth rate in 2023.

On the Chinese side, Chen Dong believes that the next few months will need to see stronger policy support: “The government may adopt additional monetary easing policies and introduce more targeted fiscal stimulus measures, such as providing subsidies to consumers. Our forecast for China's 2023 GDP growth remains unchanged at 5.5% for the time being.”

Based on this, Patek Switzerland analyzed the performance of various types of assets in the second half of 2023 --

Stocks: Adopting a prudent strategy

In the first half of 2023, the world's major stock indexes, with the exception of Hong Kong stocks, all recorded gains of varying degrees, but Swiss Patek remained cautious about stocks as a whole, and US stocks in particular.

In terms of US stocks, although thanks to US tech giants continuing to generate positive profits, what needs to be seen is that the top six technology stocks, which account for 26% of the weight of the US stock index, contributed 92% of the 2023 index performance (as of May 25). Swiss Patek believes that the valuation of US stocks is already above average, and there is a great possibility of a downgrade.

At the same time, since US small cap stocks are more susceptible to the tightening credit environment than large stocks, which are highly exposed to the two fragile industries of regional banking and real estate, the agency remains cautious about US and global small-cap stocks.

On the European side, credit problems are not as serious as America's, and valuations are relatively low. Therefore, Patek Switzerland believes that earnings expectations for European stocks will be better than those of the US.

The Bank of Japan's recent dovish stance and increased interest from foreign investors may boost the Japanese stock market. Chen Dong said that some underlying structural changes are taking place in the Japanese stock market: first, bank credit balances and capital expenditure obtained by the Japanese corporate sector have begun to grow; secondly, exogenous shocks brought about by the international macro environment have changed Japan's endogenous economic behavior, showing signs of inflation and rising wages. Once again, corporate governance reforms of Japanese companies are also in the process of advancing. These factors make the Japanese stock market worthy of investors' attention.

At the same time, Patek Switzerland is also quite optimistic about Chinese stocks. The main reason is that Chinese stocks are undervalued.

Jia Wenjian, head of multi-asset investment and management wholly commissioned by Swiss Patek Wealth Management Asia, said, “Chinese stocks have low long-term price-earnings ratios compared to their own long-term price-earnings ratio, and are lower than emerging market stocks, and lower than developed country markets. From a valuation point of view, we think we're actually not far from the bottom now, so compared to other markets, Chinese stocks are still attractive.”

But he also pointed out that Chinese stocks still need support from two sides. On the one hand, stronger policy support, and on the other hand, a rebound in profit expectations.

Bonds: Careful selection required

Compared to stocks, Patek Switzerland has a more positive view of bonds. This is because interest rates have been high since the beginning of the year, and bonds have maintained good performance. However, institutions still believe that there is a need to adopt an active and carefully selected strategy for fixed income.

In the US market, Swiss Patek is optimistic about short-term high-quality investment-grade bonds. Jia Wenjian said that interest rates are currently rising, and the yield on 1-3-year US investment-grade bonds is now over 5.6%, but at the same time, he emphasized that under the premise that the economic outlook is uncertain, as a short-term investment option, it is currently more reasonable to maintain a relatively cautious investment position on this type of asset.

However, the current yield on US long-term treasury bonds is quite attractive. If the US economy goes downturn, the safe-haven function of US treasury bonds can also be used as a safeguard tool.

In terms of bonds in other markets, Patek Switzerland believes that the prospects for euro investment-grade bonds are more optimistic, while interest spreads on Eurozone peripheral state bonds have narrowed excessively recently. The yield on Japanese bonds is low. The spread premium of high-quality investment grade bonds in Asia compared to similar US bonds is now close to the long-term median level.

Regarding Chinese bonds, Swiss Patek has always been optimistic about Chinese treasury bonds. Jia Wenjian pointed out that although the yield of Chinese treasury bonds is lower than that of US treasury bonds at this stage, we cannot ignore the safe-haven function of Chinese treasury bonds, and as a dollar investor, considering the currency hedging situation, the return can be increased by 2%.

Regarding Chinese corporate bonds, Jia Wenjian's views are consistent with those in overseas markets. Apart from short-term high-quality bonds, there are also risks in an environment of economic fluctuations, so from the perspective of asset allocation, he looks down on high-interest bonds.

Private Equity: Long-term Allocation Opportunities

According to Patek Switzerland, liquidity premiums on private equity assets, including private equity and private equity real estate, can add value to long-term investors.

According to Jia Wenjian's analysis, judging from the internal yield of private equity funds from 1981 to 2017, private equity assets generally performed better in the years after the past three financial crises. He pointed out that from 2022 to 2023, all parts of the world actually faced the same situation. Market performance was not ideal, and the real economy also faced some challenges. In this context, investors may consider allocating some private equity assets to hedge risk and reap rewards.

Chen Dong said that the return rate of private equity assets is high compared to other asset classes; in fact, the logic behind it is very simple. Generally speaking, private equity assets lack liquidity. If investors can endure relatively low liquidity, then they are bound to demand higher returns. From this perspective, Chen Dong emphasized the long-term opportunities for private equity asset allocation.

However, at the same time, Patek Switzerland pointed out that considering the long-term nature of private equity investments, fund managers' choices are the key. Additionally, benefiting from lower entry prices, newly launched private equity funds can take advantage of higher interest rates.

In addition to this, Swiss Patek also believes that in the context of an uncertain macroeconomic situation, investors can also allocate gold and hedge funds, because these two types of assets can maintain relatively stable performance while providing a safe-haven function.

Editor/jayden