The “anchor of asset pricing” is approaching the 5% warning line! Aviva shouts out to stock investors: Diversification of holdings, Chinese hyperscale enterprises have become safe havens

The Zhitong Finance App learned that Aviva Investors' global equity fund manager Richard Saldanha said that if the yield on US 10-year treasury bonds rises to 5%, stock investors should be encouraged to distribute their positions that are too concentrated.

Despite higher yields, the stock market still recorded double-digit yields this year, but he warned that once interest rates hit that threshold, the stock market could fall into a “painful range.”

Saldanha said in an interview: “There is no doubt that interest rates really matter. I think as you begin to see 10-year Treasury yields approaching 5%, it will begin to evolve into an even greater pressure point.”

After a week of turbulent bond market conditions, as of Monday morning, the yield on US 10-year Treasury bonds, which have the title of the global “anchor of asset pricing”, was around 4.7%. The US Treasury unexpectedly announced plans to buy more debt last week. Although this is touted as a move aimed at increasing the liquidity of some old US bonds, it is widely viewed by the outside world as an effort to reduce yields.

Saldanha proposed a multi-level approach to diversification. He pointed out that the construction of data centers is largely funded by operating cash flow, but in a period of rising yields, these constructions may face pressure if companies switch to making more and more use of the debt market. This will further support investors to move away from too concentrated artificial intelligence (AI) transactions.

As to what alternatives should be considered, Saldanha first pointed to the tech sector itself. He pointed out the semiconductor community, but cautioned that the sector contains significant momentum and supply and demand dynamics that need to be properly addressed.

Chinese hyperscale cloud service provider

He said that it is important to expand the perspective beyond the US, and specifically pointed out that Chinese hyperscale cloud service providers have shown different performance from their Western peers. He said that when market panic enveloped the semiconductor sector in June and July, the performance of Chinese companies was more steady. “Even within the tech sector, you can find ways to diversify your investments.”

In addition to technology stocks, Saldanha also pointed to the healthcare and consumer goods sectors as additional diversification. Within Europe, he used Unilever as an example to show that such companies can provide a certain level of safe haven. He acknowledged that Europe's healthcare sector had struggled and lost ground to recover, but said the sector remains extremely attractive, particularly given mergers and acquisitions (M&A) activities — which he cites as another reason to focus on the region.

He recommended adopting a global diversified investment route and pointed out that in view of the sharp increase in buybacks and early signs of mergers and acquisitions, Japan is a bright spot outside the US. He said that although investors should pay close attention to fluctuations in the bond market, the will to spend capital around the world is still strong.

The US Treasury's decision to increase liquidity support for long-term treasury bonds temporarily mitigated the wave of sell-offs that pushed long-term treasury yields to multi-year highs last week. However, given high oil prices, the risk of inflation, and the upcoming Jackson Hole Global Central Bank Annual Meeting this week, market sentiment may still be tested.