Get a second helping of dim sum bonds

"Sell in May and go away" is a debatable trading adage but one which has stayed with investors through the years. The long-term unreliability of the maxim notwithstanding, there is growing uncertainty as we approach the midway mark for 2014.

Some of the macro forces that have determined the course of global markets since the 2008 financial crisis are starting to morph. The US Federal Reserve is halfway through unwinding its quantitative easing (QE), or asset-purchase, program, bringing us closer to the day when it will start raising interest rates. China's economy is gradually slowing as policymakers continue to deflate a credit bubble at a controlled pace, even as they embark on wide-ranging structural reforms. And new geopolitical risks are emerging from hitherto unexpected quarters (such as Ukraine).

How should an investor safeguard his/her portfolio, and generate healthy, inflation-adjusted returns in the face of such uncertainties? We (Standard Chartered) have been recommending a diversified portfolio with overweight on developed market equities, balanced with some multi-income assets which include high dividend-paying stocks and high-yielding bonds.

We have also remained underweight on emerging market equities and bonds, although we have recently upgraded Asia ex-Japan equities to neutral. Our strategy has worked well over the past couple of years.

While we're comfortable with this broader allocation, there is still an opportunity for investors to diversify their income portfolio by adding some renminbi denominated bonds issued by the Chinese government and some high-quality, top-rated companies from China. These fixed income securities offer investors higher yields relative to comparably rated US dollar denominated bonds, while not facing the downside risks that other emerging market assets face from increasing US yields.

Last year, we got a whiff of the possible downside risks when former Fed chairman Ben Bernanke first hinted at "tapering" its asset purchase program. Not many asset classes were spared during that time of short-lived turbulence. Global equities sold off, as did US-dollar bonds. Emerging markets' currencies and other assets were hit hard as investors factored in higher US benchmark yields down the line.

Within the emerging markets space, currencies of current account deficit countries were the most affected, although many of these markets - notably India and Indonesia - have taken substantial measures since then to improve their fundamentals. However, investors in onshore renminbi denominated (CNY) and offshore renminbi denominated (CNH) bonds were among the best protected.

We're likely to see a repeat of this out-performance once the Fed completes tapering its asset purchase program. The higher-grade renminbi bonds, both CNY and CNH (or dim sum), offer investors greater security since policymakers in Beijing are likely to maintain the stability of the Chinese currency. As the risk of currency depreciation recedes, investors should get more comfortable owning short-maturity (less than three years) government bonds and high-quality corporate bonds.

The renminbi's weakness since the start of the year - which we believe was guided by the People's Bank of China (or the central bank) to flush out speculators who were excessively bullish on the currency's appreciation - is likely to have run its course, because the currency is now very close to the weakest end of the band within which the central bank aims to manage it against the US dollar. The central bank's recent actions suggest that it has stopped guiding the currency into weaker territory, raising the prospect of renewed, albeit gradual, appreciation.

With the likelihood of the downside being protected, investors have a rare opportunity to use the recent weakness to add a strategic asset class which is less correlated with a potential "sell-in-May" phenomenon. The CNY bonds offer an attractive 5.5-6.0 percent yield while the dim sum bonds yield a respectable 4.0-4.5 percent. On top of the attractive yields, there's scope for some currency appreciation. A helping of CNY or dim sum bonds could be just what investors may want to add to their plate.

The author is chief investment strategist in the wealth management unit of Standard Chartered.