Aspirations Insights: September 2023

Welcome to the eighth edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated.

In this Insights edition we cover:

  • Why bonds could make more sense than cash / term deposits
  • China, the good and the bad  

Why bonds could make more sense than cash / term deposits

With the highest USA interest rates in 22 years (5.5%), bonds have an important role to play in your portfolio, offering potential income, diversification and capital preservation. They are a form of investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments.

As bond fixed income assets now offer a generational opportunity for investors, AW has included these bond assets in all client portfolios.

The chart below shows the increase in bond yields from 2021 (green) to 2023 (pink).

Historically, bond portfolios start to outperform cash and term deposits (see chart below) as the USA Federal Reserve reaches its’ peak interest policy rate.

AW now believe that interest rates are close to its’ peak.

China, the good and the bad

The very strict COVID lock-down policy in China led economic growth to undershoot expectations and as a result, throughout 2021 and 2022 the Chinese equity market significantly underperformed global equities (see chart below). The re-opening of the Chinese economy occurred in late 2022 which led to a bounce in Chinese equities and optimism. However, in recent months, there are signs that economic growth is deteriorating.

The chart below shows the performance of the Chinese equity market (white) vs the global equity market (yellow).

The good news:

  • In 2000, the Fortune Global 500 was led by the U.S. with 179 companies while China was represented by only 10 businesses. China surpassed the U.S. as the leader on the Fortune List in 2020 and currently represents around 30% of the list’s total revenue.
  • The $1.5trn of excess savings accumulated by Chinese households during prolonged lock down periods can help to bolster spending.
  • China’s impressive pace of innovation, coupled with automation opportunities driven by an aging population and the energy transition, continues to create interesting investment opportunities.
  • The 1 year forward price to earnings (PE) ratio for MSCI China is 10 times versus its’ 10-year average of 11.4 times. That is close to the largest discount to the rest of Asia for the past 20 years.

The bad news:

  • Regulatory crackdowns by government on some of China’s most dynamic industries including property developers, internet platforms and education companies.
  • As China’s re-opening bounce is fading, the nature of the recovery remains uneven, and sentiment is fragile.
  • The household sector is yet to see fundamental improvement in income and employment prospects.
  • Policy easing and targeted measures across sectors are fueling expectations of more policy stimulus ahead, but it is unlikely to be large enough to lead significant growth acceleration in the second half of 2023.

AW perceive the bad news above being offset by the good news on offer as markets price in these risk factors. We observe very high potential returns, given low valuations combined with high potential earnings growth.

We retain our recommendation for exposure to Emerging Markets given valuation and growth metrics, but acknowledge elevated risks at this time.

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.