The current investment climate is likely characterised by (1) a moderate and drawn out economic recovery that returns to pre-Covid-19 levels of production and employment after 2021; (2) potential upside of a widely distributed vaccine within these two years; (3) moderately rising inflation; (4) marginally higher US treasury yields; (5) a weaker US Dollar; and (6) US Fed funds rates staying at near-zero levels for up to 5 years.

The steady, albeit long drawn, recovery in the global economy is the foundation for a broad-based and sustainable rebound in risk assets over the long run. However, the journey higher is seldom smooth in view of heightened uncertainty and various risk events on the horizon including the US presidential elections and Brexit.

Investors may be tempted to hold on to cash as they duck for cover, but with interest rates at crisis lows, the return on cash is abysmal. Meanwhile, haven assets like developed market government bonds are trading at negative real yields, which means that investors are effectively paying for safety. It does seem like investment options are limited and often point in the direction of taking more risk just to generate seemingly paltry returns. Hence, it is little wonder that the most pressing concern for investors is how to engage market opportunities in the time of turbulence.

Admittedly, there is no fool-proof way to generate positive returns consistently, but we can at least employ strategies to mitigate the downside risks. Dollar cost averaging is one such strategy. The concept is deceptively simple; buy more units of an asset as prices fall and buy less of the asset as prices rise. The strategy works by buying a fixed dollar amount of assets periodically, enforcing a disciplined approach to market entry. It also diversifies the timing of market entry, making volatility a friend, not a foe.

Does dollar cost averaging guarantee a better outcome over lump sum investments every single time? Not necessarily. In a rising market, a lump sum approach yields better returns as more funds are exposed to rising asset prices. But these are volatile times. A constantly rising market is not guaranteed.

Rather than sit on the side-lines, patiently waiting for the storm clouds to recede, it is a far better approach to stay invested and participate in financial markets in a systematic and prudent fashion. For this purpose, dollar cost averaging offers an easy way out. A relatively stable investment vehicle that incorporates such a strategy is certainly welcome to navigate a more precarious market environment while also providing decent regular pay outs and potential returns.

There are several risk events to watch out for in the fourth quarter, chief among them being the US presidential elections in November and the final leg of Brexit negotiations before the expiry of the transition period on 31 December. The US presidential election is expected to inject a great deal of volatility into the markets, not least because there is a risk of a contested election in the event of a close race, which could prolong the period of uncertainty about the outcome. US-China tensions may also escalate amid rising political temperatures ahead of the elections. These events are happening as the global economy continues to fight through another fresh wave of Covid-19 cases, which will inevitably hamper efforts to normalise economic activity. Still, we remain constructive about the long-term outlook for risk assets on the back of a gradually recovering global economy and a supportive policy environment that remains conducive for growth. Investors should take advantage of relatively stable investment vehicles that are invested in quality assets that provide reasonable yields to navigate choppy markets ahead.

The Federal Reserve is expected to keep interest rates close to zero for a number of years, at least until actual inflation exceeds their 2% target. The lower for much longer interest rate environment will likely trigger a frenzied hunt for yield and may prompt investors to reach for riskier assets with higher returns. Amid the potential flurry of risk-taking behaviour, investors should remain prudent and guard against investing in products with flashy returns without fully assessing the risks. They should adopt a long-term view on their investments and focus on quality assets that can offer stable returns despite the difficult operating environment. They should also stay diversified and not concentrate their bets on a single security as they search of attractive yielding assets. Diversification is important to ride out the volatile environment ahead. A bond fund invested in a wide array of high-quality fixed income securities might be an appropriate solution that helps improve returns on idle cash amid the dismal interest rate environment and, minimise single issuer risks.

Markets move and opinions change, but one adage has survived the test of time. A robust and diversified portfolio geared for the long term goes a long way. When focusing on the longer term, immediate market concerns – while notable – should not serve to distract from the initial investment goals. A robust portfolio diversified across various asset classes, as well as spread across an array of subclasses and industry sectors, may prove more resilient and is better able to weather different market conditions. The use of Exchange Traded Funds (ETFs) in a portfolio can be an added boost, as ETFs enable access to a huge range of investment options across asset classes, sectors and geographies. ETFs also add extra liquidity into a portfolio at a lower cost compared to traditional investment methods. Investors with a longer-term investment horizon but who do not wish to miss out on current market opportunities may choose to invest partially in a core portfolio and rotate selectively among other market driven strategies.

Socially responsible investing or sustainable investing can be described as an investment approach that is guided by the aim of achieving a better and more sustainable future for society as a whole. The collective betterment of society is included as a key criterion when assessing an investment opportunity. More specifically and on a practical note, individual companies are judged and rated on Environmental, Social and Governance factors (also referred to as ESG) in the investment process. Taken loosely, ESG, sustainable investing and socially responsible investing are one and the same. The key idea is to invest in companies with good controls, healthy employment practices and socially responsible business models. Research shows that companies with better ESG profiles tend to be able to borrow more cheaply and enjoy higher credit rankings and lower cost of equity capital. Essentially, companies with better ESG scores are better quality assets. In addition, companies with the strongest ESG practices relative to their peers tend to be more profitable, have less volatile earnings and are better at mitigating serious business risk that can lead to large financial losses and bankruptcies. Such quality assets can provide some downside protection to portfolios in times of market stress.

Asia continues to lead the way in the effective handling of the Covid-19 pandemic. Although there has been a resurgence of cases in this side of the world as economies relax containment measures, it has not reached critical levels that merit the sorts of extreme actions we observed in the second quarter. Asia ex-Japan is largely expected to post positive GDP growth this year, mostly buoyed by China’s recovery, versus expectations of firmly negative growth in Europe and the US. Consensus forecasts likely reflects the “first in first out” effect as it relates to the Covid-19 crisis. Asia was also somewhat less affected by the September sell-off with the MSCI Asia ex-Japan index sliding just 1.68% for the month versus developed market stocks which fell 3.60%, as measured by the MSCI World Index. In light of risks emanating from escalating US-China tensions and lingering uncertainty about the US presidential elections, volatile market conditions will continue to sustain in the near-term. Still, we remain constructive on Asia ex-Japan’s long-term growth outlook and would engage opportunities in the region via an actively managed and diversified portfolio of stocks and bonds to ride out near-term turbulence.

With stocks trading at fairly extended valuations, there is admittedly limited scope for robust gains via further capital appreciation, especially given that we are not working off a low base and that the economic outlook remains deeply uncertain. The volatile market environment complicates this prospect as well. As a result, income — via dividends from stocks and coupons from bonds — will become an important driver of total return. Amid the uncertain macro environment, troubled by a litany of risks including a resurgence of Covid-19 cases, political uncertainties associated with the US presidential and congressional elections and Brexit, finding a predictable and sustainable source of regular income might be tricky. Indeed, amid the challenging operational backdrop, creating diversified income streams through careful stock and bond selection remains crucial. However, this is often easier said than done. Rather than expend huge amounts of time and effort to do this from the ground up, investors can take advantage of the wide array of investment funds that have a proven track record of delivering consistent and predictable income.

We remain constructive on emerging market (EM) high yield bonds with a preference for Asia over the medium-term for a few reasons. First, the Federal Reserve’s dovish bent and accommodative monetary policy stance should remain supportive of bonds generally. Second, there are increasingly fewer compelling fixed income alternatives that offer similar, if not better, risk-adjusted returns. Third, the gradual economic recovery and the likely passage of an expansionary fiscal stimulus bill through Congress regardless who the next president is should provide a supportive growth tailwind for this asset class. Still, we are mindful of rising default risks in emerging markets due to the challenging, virus-stricken operating environment and increased volatility due to persistent US-China tensions. It is also important to note that in the coming weeks leading up to the US elections, EM high yield could underperform due to risk-off positioning amidst higher volatility. As such, we would pay careful attention to credit selection and advocate diversification across a wide range of issuers to mitigate these downside risks. An Asia-focussed High Yield fund would be useful to express these investment views.