Positioning Portfolio Amidst Geopolitical And Policy Concern

 2 min read    I     Date: 15 March 2022

Positioning Portfolio Amidst Geopolitical and Policy Concern

In brief

  • Spill over events from last year i.e., inflationary pressures and the US Fed pivoting towards a faster tightening policy have contributed to the recent sell down in global equities. Technology names bear the brunt of the correction with a sharp derating in valuations.
  • The latest US Fed guidance reinforced market expectations that rates will begin to rise in March. Our base case remains at 6 hikes in 2022 as we expect supply constraints to gradually ease with inflation to fall through 2022, thus easing the pressure to hike interest rates. 


What should investors do?

  • Despite the recent volatility, it’s important to remember that we are still in an environment where economic growth and earnings remained healthy. In our base case, we still expect upside for equity markets to remain balance over the year. Please refer to Table 1, where it is shown markets would be back to positive territory within 3-6 months after a geopolitical incident.


        Table 1: Market reactions to geopolitics

        Table 1      

          Source: Bloomberg, Principal Global Investors. *Peak level around key dates. Data as of February 23, 2022Source: Bloomberg, Principal Global
          Investors. *Peak  level around key dates. Data as of February 23, 2022
  • Our asset allocation strategy has a balanced preference for equities and bonds. We are mindful of the various risk scenarios that are developing and are focused on ensuring that our portfolio construct has a sensible risk profile. 
  • Stick to funds that are focused on quality companies: In a more volatile environment, we have added quality growth companies, with sustainable earnings growth at reasonable valuations to our portfolios.  Quality refers to attributes like market share gains, return on equity, resilience to shocks, and pricing power. All our Asian, ASEAN and Malaysian funds are large cap focused on quality and hence have less volatility.
  • Diversifying to funds that also have an exposure to value sectors: In a higher interest rate environment, value sectors such as Energy, Commodities and Financials tend to do well. This is especially the case for ASEAN and Malaysia markets. 
  • Fixed income assets still offer capital preservation benefits. With less volatility seen compared to the equity funds so far this year owing to the markets having gradually adjusted to the key central banks’ tightening stance since Q4 2021, we believe the domestic fixed income funds are off their lows and should start to stabilize in the near term. 

We maintain our preference on the credit segment with a focus on the primary issuances which offer better yield pick-up. On duration, we hold a neutral stance as the external headlines are expected to continue to dampen sentiments in the domestic bond market with portfolio duration.

What to do next?

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We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness, or correctness. Expressions of opinion contained herein are those of Principal Asset Management Berhad only and are subject to change without notice. This document should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell Principal Asset Management Berhad’s investment products.