Evan Brown, head of multi-asset strategy, and Ryan Primmer, head of investment solutions,
Policymakers have significantly reduced the left tail risk, namely that this economic and health crisis would morph into a financial crisis.

In the near term, investors will have to weigh the severe economic contraction against this policy response, alongside evolving news on the virus and mobility restrictions. This will keep markets volatile over coming weeks. Going forward, we believe that the expected returns on risk assets have improved while those on sovereign bonds have worsened.

COVID-19 and the associated steps to contain its spread have caused what is likely to be the sharpest contraction in economic growth in history. In addition to causing tragic human and direct economic costs, the speed of the shock exposed underlying fragilities in financial markets.

Policymakers around the world are delivering robust policies to defend against the COVID-19 shock. (…) Overall, the net global fiscal stimulus as a percentage of GDP already surpasses that of 2008-2009. Indeed, while we are enduring an unprecedentedly sharp contraction, this may end up being the shortest recession in history assuming that economies can come back online over the coming months.

Given the wide range of possibilities in this environment, we are keeping overall risk asset exposure near benchmark. Our focus continues to be on relative value, overweighting equity markets in Asia, which appear to have seen the worst of the virus. “In fixed income, we are long real yields as protection against further deterioration in risk appetite and as central banks do whatever is needed to ease financial conditions. With the recent selloff, valuations for risk assets have broadly improved and may provide opportunities for long-term investors. At the same time, the prospective returns for sovereign bonds have worsened."

Norman Villamin, chief investment officer, wealth management, , the Asian investment management arm of Prudential
Our country and sector positionings are a result of the bottom up stock picks. The team is overweight large cap and liquid banks in China which have high provision levels and better balance sheet strength than during the 2008 financial crisis. They have been relatively defensive in the down market. In contrast, we remain underweight Australian banks; as a commodity-driven economy this market and its currency have sold off heavily on big daily moves related to the China slowdown. As a whole the team is overweight financials.

We have also been overweight selected technology names having found many attractively valued stocks in the sector across the region from Korea, Taiwan and China. Many of these stocks have held up relatively well. The team has been a little cautious on attractively valued energy and materials names over recent years given that many are heavily dependent on the commodity cycle. The existing exposure is biased towards companies that have opportunities which are less sensitive to commodity prices. Hence, we believe our positioning to be relatively resilient despite having seen these names suffer in the recent turmoil.

Healthcare stocks have performed well given the recent global focus on this area. However, these stocks were expensive before the collapse in equity markets and remain relatively expensive. Hence the team has very little exposure to these names. Similarly, the popular consumer discretionary names have been expensive and offered little opportunity. However, this has dented performance as a few large names that have benefitted from an increase in home shopping have performed relatively well.

From a country perspective, our views are again driven by stock specific opportunities, however these tend to be somewhat aligned with where top down valuations lie. The largest underweight has been Australia due to the underweight to the consumer, healthcare and banks names, the latter of which has been under substantial regulatory scrutiny in recent years. India is another underweight with few attractively valued names. Nonetheless, there are more stocks of interest coming onto our research agenda in recent months.

The largest pockets of attractively valued stocks are in South Korea and Singapore. Many of these names have been under appreciated due to the market’s focus on the near term and cyclical concerns. But on a medium to long-term perspective, these are attractive opportunities.