How To Strengthen Your Portfolio’s Core?: Focus on Strategic Asset Allocation
Investment Navigator - Asia Version [May 2020]

HIGHLIGHTS
- The sudden, violent bear market underlies the crucial role that an investor’s strategic and tactical asset allocation plays in portfolio returns during volatile time periods.
- The recent volatility allows increased allocation to one of our favoured 2020 megatrends: 5G as the enabler for digital solutions in the social distancing economy accelerated by Covid19.
Why is Asset Allocation Crucial to Strengthen your Portfolio’s Core?
The record speed of the equity sell-off has led to the fastest bear market in history, with the Dow Jones plunging 20% in just 20 days. Typical bear markets on average take 13 months. Hence, this highlighted the importance of balanced asset allocation.
The recent rebound across credit and equities provides valuable breathing room for investors to implement target asset allocation or modify and rebalance their existing allocations accordingly.
Strategic asset allocation is a structured approach to investing while creating discipline around shorter-term market movements via tactical asset allocation. At the same time, it seeks to avoid some of the behavioural biases such as “greed and fear”, (i.e. buy high, sell low, overreliance on market timing) which can have a disproportionate impact on investment returns. Therefore, robust returns are achievable over a 5-10 year time horizon, even with significant intra-year market drawdowns such as in 2020.
According to historic analysis, Strategic asset allocation is the most important driver of returns over the long term. It explains more than 75% of the variability of returns, while the other three elements, namely security selection, tactical asset allocation and market timing together only account for the remaining of less than 25%.

Chart1: What is the most important determinant of portfolio return?
Many private investors are too focused on short-term market opportunities and as a result, miss out on the biggest determinant of portfolio returns – strategic asset allocation. Therefore, it is well worth spending some time to define one’s own strategic asset allocation as a complement to shorter-term tactical asset allocation strategy. In short, don’t let the tail wag the dog!
Diversification is an important part of asset allocation. “Diversification is the only free lunch in investing”. This phrase was coined by Harry Markowitz, Nobel Prize-winning economist.
Investors don’t pay enough attention to how to diversify their portfolios effectively and are not as diversified as they think they are. It is difficult to predict the top asset class performer every year, while a diversified portfolio is well positioned to take advantage of varying asset class returns.
The recent volatility is an excellent time to put your plan in motion
By definition, market corrections are often hard to predict. Furthermore, the strongest returns often come shortly after the worst period of returns. In fact, since January 1999 to December 2019, 6 of the 10 best days occurred within two weeks of the 10 worst days.
This chart illustrates that missing out a handful of days could have a big impact on investors’ long-term total returns, as compared to those investors who stayed fully invested for 20 years even during dot.com crash in 2000 and global financial crisis in 2008.

Returns of S&P 500 Performance of $10,000 between January 3, 2000 and December 31, 2019, annualized total returns
How Do You Stay Committed?
Staying invested with regular portfolio rebalancing!
Tactical Asset Allocation: Accumulate Exposure to 5G Theme
In that regard, take advantage of the volatility and tactically asset allocate to one of our Mega-Trends for 2020: 5G is accelerating in pace due to COVID-19 and the world-wide stay at home orders. Never before has the consistency, reliability, and speed of the backbone of the network been so paramount.
The innovation that has accelerated including remote patient diagnosing, contactless delivery, b2b supply chain automation, enabling the delivery of key goods and services when most of the economy is not operational. The “New Normal” will likely last well beyond the health crisis – A social distancing economy. The interplay of 5G and artificial intelligence is a powerful tool that will be the priority spending going forward, despite the economic slowdown.
Conclusion
Don’t try to time the market with the “core” of your portfolio.
Keep your core engaged and invested at all times for “fully fit” cross-market cycle market returns. What should be in the core?: global equities, global investment grade bonds, select high yield bonds, alternatives such as private equity, and gold.
Take extra exercises via your tactical allocations. These tactical allocations could include mega-trends like 5G, Artificial Intelligence which are being accelerated due to the COVID-19 virus.
CIO INSIGHTS – GDP & CPI FORECASTS

GROWTH
Containment measures have been generalized on a wider scale than compared to our initial assumption. This will not only lead to more negative direct effects on growth but also increases the risks of so-called second-round effects. One of the greatest concerns hampering growth is the resurgence of the coronavirus after containment.
Worsening outlook due to new assumptions on length and type of exit strategy has led us to further downgrade our economic outlook. We expect decisions regarding renewed lock-down periods to be based on the ability of both health infrastructure to deal with such a fall back and economic and social structures to face the consequences of renewed limitations. There may also be other negative risk factors including a bigger negative effects on supply and potential structural changes such as deglobalisation and digitalization (remote access, e-commerce).
In our base case, we use the assumption that most measures will be removed within the next two months. A longer period of trial and error would lead to a W scenario instead of a U shape scenario. We still expect activity to improve gradually by year-end, but we revise down our full-year growth forecasts further. Global GDP is expected fall by 2.5% this year before growing to the tune of 5.8% in 2021.
INFLATION
In the medium term, we continue to expect deflation to be the main risk. However, our base-case scenario is that inflation will recover gradually as policy measures are implemented, which will improve business and consumer sentiment. This in turn should help to normalise the job market, wage dynamics and credit growth over the next two years. For 2021, inflation should approach 2% in most developed economies while stabilising close to 1% in the Eurozone.
Global equities recovered 25% in April, given the unprecedented efforts by global central banks and governments, having lost 34% in March. We expect further downward revision in earnings and the market to consolidate in the near term. We believe stock markets to stand higher than current levels by year end, due to the prospect of returning earnings in 2H 2020.
In Asia, we turn positive from neutral for China and Taiwan in the medium term. We believe the worst in domestic demand shock is behind us for China, and a gradual recovery in domestic consumption should start imminently. Taiwan would be a beneficiary of shifting of global supply chains as well as the 5G and AI megatrends. We also upgraded consumer staples to positive, as well as industrials and consumer discretionary to neutral as the pandemic should have peaked out in most Asian region. With social distancing regulations being relaxed gradually, strong pent-up demand should drive a rebound in consumption and industrial activities.
CIO INSIGHTS - EQUITIES

Global equities recovered 25% in April, given the unprecedented efforts by global central banks and governments, having lost 34% in March. We expect further downward revision in earnings and the market to consolidate in the near term. We believe stock markets to stand higher than current levels by year end, due to the prospect of returning earnings in 2H 2020.
In Asia, we turn positive from neutral for China and Taiwan in the medium term. We believe the worst in domestic demand shock is behind us for China, and a gradual recovery in domestic consumption should start imminently.
Taiwan would be a beneficiary of shifting of global supply chains as well as the 5G and AI megatrends. We also upgrade consumer staples to positive, as well as industrials and consumer discretionary to neutral as the pandemic should have peaked out in most Asian region. With social distancing regulations being relaxed gradually, strong pent-up demand should drive a rebound in consumption and industrial activities.

CIO INSIGHTS - FIXED INCOME

The Fed has thus far deployed a wide range of tools to counter the Covid-19 economic shock, and to restore liquidity in the market. After lowering rates to near zero, the Fed began buying substantial amounts of assets, both sovereign and IG-rated corporate bonds and loosen collateral rules. Lately the Fed also accepted some HY bonds which were downgraded to BB from issuers rated IG as of 22 March 2020.
The Fed is also buying HY ETFs, though likely in limited amount, and all the above actions have contributed to restoring confidence in the fixed income market.
Similar to equities, the fixed income space globally recovered strongly in the month of April. US IG and HY space saw stabilisation and improvements given the swift monetary response from the US Federal Reserve. Credit spreads of both IG and HY have narrowed from a high during the March market rout, while fund flow into the fixed income space also increased strongly in April.
Likewise, Asia and EM credit followed a similar rebound. Investor’s sentiment turned more positive as the month progressed, while easing dollar funding stress reduced their rushed towards USD liquidity. We turn neutral from positive for Hong Kong and Singapore credit. Fundamental should deteriorate further while uncertainties will likely remain in the near future. Despite so, valuation is still appealing after the correction, and both markets are still one of the safest in the region for bond assets.
CIO INSIGHTS - FOREX

GBP: We expect a renewed focus on Brexit newsflow in coming weeks. The UK has until the end of June to decide whether to extend the transition period. In the short term, with overall a net long positioning by speculative investors, GBP will be vulnerable to a rise in negative sentiment, especially on the increase in probability of a ”harder-Brexit”. Our base case is that the Brexit transition period will be extended, and thus we keep our 12-month target at 1.32.
EUR: In the short term, the progressive easing of the lockdown and the resumption of the economic activity should support the euro. We also see an appreciation of the euro over the medium term, driven by the low yield spreads between US and German rates. We maintain our 3 and 12-month targets at 1.14 and 1.16.
CIO INSIGHTS – ALTERNATIVES & COMMODITIES

COMMODITIES
OIL: We do not expect a sustained recovery in oil prices until demand is unleashed through the lifting of lockdown measures and travel restrictions worldwide. The combination of a rebound in global demand as early as summer and a fall in supply should help the Brent oil price recover towards $45-55/b in 2H 2020.
GOLD: We revise up our expected trading range to $1600-1800 as monetary stimulus will only put more pressure on real bond yields to stay lower for longer. Massive quantitative easing is also scaring some investors about the value of fiat currencies and reinforces the attractiveness of gold as a hedge.
ALTERNATIVES
LONG-SHORT EQUITIES: We stay positive on long-short equities strategy. The sell-off offers stock pickers a unique chance to upgrade their buy list into higher quality names with substantial recovery potential, as well as to identify future winners and losers of this global health crisis.
EVENT-DRIVEN: We are positive on event-driven strategy. A new wave of distressed investments will emerge from this Covid-19 crisis, with significant opportunities for restructuring experts.
Click on the link below to download the full report in PDF. In addition to the above content, you get:
Information about BNP Paribas Portfolio Optimizer, a proprietary methodology that we use to advise our clients.
And a quick note from our Discretionary Portfolio Management (DPM) team on Why do we expect USD bond as an asset class to stay in strong demand?