SINGAPORE (Nikkei Markets) -- Despite the steep losses recorded by many equities markets, bankers to Asia's wealthy advise staying invested in stocks, especially those in Asia where valuations have become attractive.
There are three reasons for their optimism. They believe that a global recession is a remote possibility and that the trade war between China and the U.S. is unlikely to worsen. They also hold that central banks will refrain from aggressively raising interest rates as inflation remains benign in most parts of the world.
Still, the bankers do advise guarding against volatility. For investors, that means holding higher levels of cash and focusing on quality companies with strong cash flows and low debt levels.
"We believe there is a danger that investors have now become too pessimistic and that investor fears of a global recession are overdone," said Fan Cheuk Wan, chief market strategist for Asia at HSBC Private Banking, the region's fourth-largest private bank in terms of assets under management.
The turbulence in markets, which accelerated in the latter half of 2018 alongside fears of a debilitating trade war between China and the U.S., has upended many established investing patterns. Unusually, most financial assets, including traditional safe havens such as gold and government bonds, declined in value last year.
The losses have made many markets and high-flying stocks more affordable. For instance, the Hong Kong-listed shares of Chinese internet group Tencent Holdings have fallen by around 30% since the start of 2018. In Singapore, banking major DBS Group Holdings now trades at a dividend yield of 5.2% or about two-and-a-half times the yield on 10-year Singapore government bonds.
Among Asian markets, private banks rate China, Hong Kong and Singapore as the most attractive. In terms of sectors, their recommendations for investment include technology and healthcare.
John Woods, Asia-Pacific chief investment officer at Credit Suisse, Asia's number three private bank, said that Chinese stocks had fallen so sharply that they were like a "coiled spring" waiting to be released at the first credible sign of a buy catalyst.
Woods is also bullish on Singapore due to the high dividends paid by the city-state's blue-chip companies.
Many private banks are also advising the wealthy to allocate a higher proportion of their portfolio to alternative assets such as hedge funds that can benefit from both rising and falling markets. Hedge funds are typically available only to institutions and clients of private banks with millions to invest.
Asia has the world's largest concentration of billionaires, the majority self-made, according to a report by UBS and PwC. Asian Private Banker, an industry publication, estimates the region's top 20 private banks managed some $2 trillion in assets last year, an increase of 29% from 2016.
Speaking to the media on Friday, Hou Wey Fook, chief investment officer for consumer banking and wealth management with DBS, which ranks in 6th place among Asia's top private banks, said chances of a global stock market crash were low, due to the positive yield spread enjoyed by equities over government bonds. This is unlike in 1987 when the 10-year U.S. Treasury offered investors a yield of over 9%, much higher than the 4.7% earnings yield of U.S. companies at that time.
Turning to DBS's preferred investment themes, Hou said the healthcare sector would provide investors with steady earnings growth over the coming years, with people growing richer and living longer. The sector is also likely to benefit from a strong pipeline of new prescription drugs.
He also identified "athleisure," or sporting clothes that double as leisure wear, as a focus area, noting their growing popularity. Sportswear companies like Adidas and Puma that have tied up with celebrities to introduce new lines of clothing have fared better than more traditional companies like Mizuno and Asics, he said.
HSBC advised investors to pay greater attention to so-called environmental, social and governance, or ESG, factors, as these would help investors manage financial risks arising from environmental events, reputational damage and governance issues.