Cut Interest Rates: Diversify into Bonds, Growth Stocks, & Data Sector

As major central banks begin to ease monetary policy, investors who have recently preferred to hold cash for high interest earnings will face new challenges due to the anticipated decline in returns.

To prepare for the next economic cycle, it is time to reduce cash holdings and shift funds to other asset classes to pursue higher returns while avoiding increasing macroeconomic uncertainty and geopolitical risks.

Faced with this economic environment, the latest Gatekeeper Pulse study by PGIM Investments found that Asian fund selectors representing several large global financial institutions prioritize diversification, risk management, and income generation in their portfolio strategies.

Private alternative investments, active fixed income, global equities, and industries driven by artificial intelligence, such as data centers, will be the main asset classes to be increased in the coming year.

Global private investors are expected to increase their allocation to alternative investments from approximately $4 trillion last year to $13 trillion by the end of 2032.

However, as high as 76% of Asian fund selectors point out that investors in the region are still under-allocated in the rapidly developing private equity market.

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The lack of access to private markets and low risk tolerance are the main obstacles to allocating private alternative assets.

As a result, fund managers are introducing more attractive fee structures, enhancing transparency, and investment convenience to encourage investors to allocate more alternative assets.

At the same time, investor education needs to be strengthened to convey the benefits of adding private alternative investments to a diversified portfolio.

It is well known that public markets are susceptible to short-term fluctuations.

In contrast, private markets can not only bring more substantial risk-adjusted returns to investors but also hedge volatility and provide downside protection.

Concerns about the recent correlation between stocks and bonds have prompted 64% of Asian fund selectors to plan a shift towards private alternative investments to further diversify the risks in their portfolios.

Data centers are in focus, and it is worth noting that under the trend of technological transformation driven by artificial intelligence, the investment enthusiasm for data centers continues to rise.

The survey shows that nearly 60% of Asian fund selectors intend to increase their allocation to this emerging alternative investment in the coming year.

In fact, with the surge in data storage demand and limited supply, data centers are rapidly moving from niche to mainstream investments, bringing rare growth opportunities for long-term investors.

Other areas in the private market are also favored.

Asian fund selectors remain optimistic about the prospects for global private credit, with 60% of respondents expecting an increase in private credit returns in the coming year.

Areas such as direct lending, fund of funds, mezzanine financing, special situation investments, and secondary market transactions are all receiving attention.

Bonds are in a strategic buying range.

The rise in bond yields has created a favorable environment for bond investors to lock in the highest starting yields in nearly a decade.

When central bank policies shift to maintain interest rates or cut rates, the correlation between stocks and bonds tends to decrease.

This further confirms the importance of diversifying bonds to spread risk.

Bonds not only offer more attractive investment returns but also cushion the impact of stock market corrections.

Looking ahead to the next year, 59% of fund selectors expect returns in the public bond market to increase, and 52% of fund selectors plan to increase their allocation to public fixed income, the highest among all asset classes.

In pursuit of excess returns, 74% of fund selectors are increasing credit risk in investment-grade bonds, while 67% of fund selectors are optimistic about high-yield bonds.

In addition, the policy divergence of global central banks has also created opportunities for active bond managers to obtain additional returns.

Fundamentals support growth stocks.

Despite ongoing market volatility, it is worth noting that 74% of Asian fund selectors believe that an environment of declining interest rates will drive capital back into the stock market, but there is a clear preference for domestic markets.

Two-thirds of Asian fund selectors plan to increase their allocation to Asia-Pacific equities in the next 12 months, a proportion 50% higher than the overall average.

Global equities (57%) are also the primary target for fund selectors to increase their holdings, followed by various thematic stocks (54%).

Considering that value stocks are more dependent on the economic cycle, 59% of fund selectors expect growth stocks to outperform value stocks.

Although loose policies bring favorable factors, corporate fundamentals are the true drivers of long-term stock performance.

As the overall economy slows down, companies with sustainable profit growth and strong demand will become more attractive, and it is expected that growth stocks will benefit during economic slowdowns.

In addition, areas driven by innovative forces and unaffected by the economic cycle show strong growth, providing investors with remarkable investment opportunities, especially in thematic areas driven by artificial intelligence, global luxury consumption, industrial automation, financial technology, and healthcare innovation.