Adjustments To Our Asset Allocation July 11, 2017
Following strong market performances thus far in 2017, we are modifying our asset allocation to in lieu of developments and what we expect for the future.
Author : iFAST Research Team

Adjustments To Our Asset Allocation

Looking to the future

Our call to overweight position in equities vis-à-vis fixed income in our Key Investment Themes 2017 has benefitted those who have followed our recommended asset allocation as equities around the world have staged strong returns, particularly our preferred regional markets of Asia ex Japan and Emerging Markets which have charged ahead and delivered strong returns thus far, justifying our bullish call on the regions. A snapshot of how markets under our coverage have done on a year-to-date basis in 2017 can be seen in Table 1 below.

Table 1: Strong year-to-date performance.

Market 1H2017 Returns
Asia ex-Japan 21.1%
India 19.1%
Korea 17.6%
Emerging Markets 17.1%
Hong Kong 15.9%
China (HSML100) 14.3%
Singapore 12.7%
Taiwan 11.2%
Global Equities 10.3%
Indonesia 9.0%
USA 8.4%
Malaysia 7.0%
Europe 5.6%
Japan 5.1%
Brazil 4.7%
Thailand 1.7%
Russia -12.7%
Source: Bloomberg, iFAST compilations. Returns in local currency terms, excluding dividends, as of 30 June 2017.

Although markets have done well thus far, valuations have tracked higher as returns have outpaced the earnings revisions seen earlier and there has been a lack of continued strong positive revisions to earnings. Where once we saw plenty of forecasted returns in early 2016 when markets were having a fire sale and December 2016, this number has been in decline for most markets under our coverage since then as seen in Figure 1.

FIGURE 1: Lower Estimated Returns Moving Forward.

Given the decline in forecasted returns, we are adjusting our recommended asset allocation. While we began the year with a +10% overweight in equities vis-à-vis fixed income, we are now reducing this overweight to +5% given the expectations of lower returns from equities moving forward (Table 2 below). We had previously called for Asian equities and Chinese equities to deliver returns of 40% and 60% respectively by the end of 2018 as mentioned in the articles Asian And Emerging Markets To Return 40% Over Next Two Years! and The Hang Seng Index Will Hit 32,000 By End-2018!. With Asian and Emerging Market equities delivering returns of 21.1% and 17.1% respectively, we are trimming our star ratings by 0.5 stars on the two regions to reflect their strong returns, higher valuations as well as lower estimated potential returns. They are now rated 4.5 Stars, down from 5.0 Stars but still within the "Very Attractive" rating. Single country markets that have had their star ratings adjusted downwards are Hong Kong and China for the same reasons as the two regional markets. Both single country markets are also rated 4.5 Stars now, down from 5.0 Stars but still within the "Very Attractive" rating as well after returning 18.5% and 18.1%. Table 3 below documents the changes in our Star Ratings.

Table 2: Asset allocation changes.

Market Previous Allocation
(Bonds : Equities)
New Allocation
(Bonds : Equities)
Conservative 80 : 20 85 : 15
Moderately Conservative 60 : 40 65 : 35
Balanced 40 : 60 45 : 55
Moderately Aggressive 20 : 80 25 : 75
Aggressive 10 : 90 10 : 90
Source: iFAST compilations, as of 11 July 2017.

Table 2: Asset allocation changes.

Market Estimated Potential Return (end-2018) Old Star Rating New Star Rating
Russia 26.6% 4.0 - Very Attractive 4.0 - Very Attractive
China (HSML100) 48.8% 5.0 - Very Attractive 4.5 - Very Attractive
Korea 34.5% 4.5 - Very Attractive 4.5 - Very Attractive
Hong Kong 33.6% 5.0 - Very Attractive 4.5 - Very Attractive
Taiwan 23.7% 4.0 - Very Attractive 4.0 - Very Attractive
Singapore 23.6% 3.5 - Attractive 3.5 - Attractive
Emerging Markets 23.0% 5.0 - Very Attractive 4.5 - Very Attractive
Indonesia 14.3% 3.0 - Attractive 3.0 - Attractive
Asia ex-Japan 35.9% 5.0 - Very Attractive 4.5 - Very Attractive
Brazil 15.9% 3.5 - Attractive 3.5 - Attractive
Japan 29.1% 3.5 - Attractive 3.5 - Attractive
Thailand 5.9% 3.0 - Attractive 3.0 - Attractive
Malaysia 8.7% 3.0 - Attractive 3.0 - Attractive
India -0.2% 3.5 - Attractive 3.5 - Attractive
Europe -0.7% 3.0 - Attractive 3.0 - Attractive
US -7.0% 2.5 - Neutral 2.5 - Neutral
Source: iFAST compilations, as of 30 June 2017.  

Going Neutral on US High Yield

In addition to reducing our overweight in equities vis-à-vis fixed income, we are also changing our view on US high yield bonds to neutral from a previously positive stance. Both yields and spreads for the riskier fixed income segment have come down from when we went positive on them, with the segment delivering a very good return of 22.1% from 8 March 2016 until 8 June 2017 in local currency terms. While the blow out in spreads allowed us to be positive on the sector from March 2016, the subsequent fall in yields and compression in spreads (even amidst a low risk-free rate) compels us to take a more neutral stance towards the sector.

FIGURE 2: Not Getting A High Yield for US High Yield.
FIGURE 3: Spreads Are Compressed.


As markets are constantly in a state of flux with opportunities and risks rising and falling, investors need to be ready to make the necessary adjustments to their portfolios to ensure they are positioned appropriately for the future. With the adjustments made to our recommended asset allocation, we believe that investors should be appropriately positioned to both weather and take advantage of risks and opportunities further down the road.

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