Barings favours Asian equities and US high yield credit

Barings’ multi asset group has raised its exposure to emerging Asian markets for the first time in years, the company announced.

The asset class has been upgraded from neutral to preferred.

The shift in allocation came from Japan into emerging Asian markets, “largely driven by China engaging in monetary and fiscal stimulus” coupled to a weakening US dollar.

Barings’ multi asset team assesses these factors will support the local and regional economy and believes some of the benefits spilling over into developed markets.

Marino Valensise, head of Barings’ Multi Asset Group, said: “Japan is the one major region in which data has been genuinely lacklustre.

“With the Bank of Japan struggling for traction in its war to help the yen depreciate, it was time to reduce the position. We retain an exposure to Japanese equities, but the bar has now been set higher for corporate Japan and for Shinzo Abe’s government.

“We believe the scale of the credit boom unleashed in China over the past few months is significant and should benefit emerging Asia. We are viewing this as a temporary cyclical recovery, while the secular story remains more downcast. For this reason, our allocation has been modest so far.”

Another segment upgraded by Barings from preferred to strongly preferred has been the US high yield credit.

Valensise commented: “High yield has been under pressure since mid-2014. As the price of oil declined, high yield bonds were hit by the deteriorating creditworthiness of energy issuers and other sectors have followed.

“The most negative projections are now factored in and a yield-to-maturity hovering around 8-10% is attractive. It allows for a certain margin of error in the event of a further deterioration in credit conditions. We are convinced investors with a time horizon of 18 months will be well rewarded.”

Barings has initiated a defensive move regarding sterling because of the uncertainty of a Brexit, that has resulted in a downgrade of the currency from neutral to not preferred.

The firm’s multi asset group is cautious on Europe but has retained a preferred rating on the region’s equities, given the progress in economic growth in the eurozone.

Valensise concluded: “We must consider the upcoming Brexit referendum given that its outcome will impact not only the UK but the entire European Union.

“We believe that the repercussions of a vote in favour of Brexit would be material for markets; we are therefore holding 25% in foreign currencies, while underweighting sterling.”

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