Cross-Asset Investors See Asia Stocks Beating Junk Bonds in 2021
Pedestrians exit an escalator at the Singapore Exchange headquarters. (Photographer: Bryan van der Beek/Bloomberg)

Cross-Asset Investors See Asia Stocks Beating Junk Bonds in 2021

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Asian equities are seen set for a brighter 2021 than the region’s high-yield bonds, as everything from a global rotation to value and efforts to tackle climate change improve opportunities in stocks.

While stocks and junk bonds have both been touted as among the most lucrative asset classes in Asia this year, equities seem to be gaining more prominence. T. Rowe Price Group Inc.’s multi-asset team sees them offering a better upside in what promises to be a good year for Asian risk assets overall, while a similar view is shared by BNP Paribas Asset Management, who sees themes including the transition to clean energy creating more opportunities for alpha.

Cross-Asset Investors See Asia Stocks Beating Junk Bonds in 2021

“We are more overweight Asia equity or value equity, because they might be the beneficiaries of the rotation that’s going to happen next year,” said Thomas Poullaouec, head of APAC multi-asset solutions at T. Rowe Price. The team still likes junk bonds, but the “easy money” in high-yield bonds is already gone, he said.

While global income hunters continue to chase Asia junk bonds, Poullaouec sees valuations as less appealing than earlier this year. Spreads on those notes have tightened almost 600 basis points since peaking in March, according to a Bloomberg Barclays index.

Cross-Asset Investors See Asia Stocks Beating Junk Bonds in 2021

Along with the key catalyst of a coronavirus vaccine, a recovery in earnings will help lagging stocks like Chinese banks and materials firms narrow the valuation gap with growth and momentum peers, Poullaouec said. An index of value stocks in Asia outside Japan rose another 1.4% last week in its fifth straight week of gains, beating the MSCI Asia Pacific Ex-Japan index’s 1% advance.

Brighter Outlook

Paul Sandhu, BNP Paribas Asset Management’s head of multi-asset quant solutions for Asia Pacific, also expects Asian equities to outperform high-yield notes in 2021. A better containment of the pandemic and a weakening U.S. dollar underpin the brighter outlook for stocks, he said, along with investment opportunities from efforts to tackle climate change.

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“It’s not one-or-the-other type of situation,” said Sandhu, who is also positive on local currency debt. “But I think the highest-performing asset class is going to be equities.”

The preference for Asia equities comes as some firms have turned optimistic on stocks over credit globally.

Amundi Asset Management expects a rotation out of high-yield credit to stocks, citing a phase of mild recovery and earnings re-acceleration in 2021 that will ensure a better risk-return profile for stocks, according to the firm’s 2021 outlook note. Singapore’s Maitri Asset Management Pte. also sees global stocks outperforming.

“We have increased our allocation to equities and reduced allocation to developed market government and investment-grade corporate bonds,” said Ankit Khandelwal, the fund’s chief investment officer.

©2020 Bloomberg L.P.

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