December 2020

Roundtable: ‘What’s priced in versus what surprises’

Funds Global Asia – You mentioned the unknown unknown, but now that we know what we do, has this prompted a conversation and examination around where the risks may have been traditionally underpriced, given that we knew about infectious diseases pre-Covid? Coxeter – Yes, and what it does is shine the spotlight on risk-management approaches, perhaps relying less on some of the traditional modelling approaches that have been used. It’s really important to have a qualitative, forward-looking, holistic approach to risk, and you also don’t want to be relying too heavily on historical relationships and modelling as your only source of insight for risk management. What we are seeing is some clients looking towards a broader range of systemic risks in their portfolio and how to position for those over the very long-term, it’s not just about the shorter-term risks. Funds Global Asia – China has the world’s second-largest equity and bond markets globally, but ownership by foreign investors is relatively low (3%). In our 2020 China Investor Sentiment Survey, 47% of respondents said that their institution (or their investor clients) will increase investment to China. A further 11% said they will invest in China for the first time, with only 6% indicating they will reduce their investment allocations to China over the coming year. What are your expectations from a strategic asset allocation perspective over the next 12-18 months? Ban – There is no doubt that strategic allocations will most likely increase through time. We’re seeing a lot of interest in this, and there are several reasons for it. Firstly, China’s recovery from the pandemic has helped, but we are also seeing things such as increased accessibility and increased representation in both equity and fixed income indices. There is also an awareness of the fact that companies offer diversification potential and also on the bond side, where developed market government bond funds may not offer that diversification potential or yield any more while China bonds actually do, both in terms of diversification and the yield potential. So, there are various factors supporting both the equity as well as the bond market outlook in terms of increased adoption. We are coming from a very low base here, and I generally see the availability and accessibility increasing, coupled with the attractiveness, and these factors together will contribute to higher strategic allocations over time. Jagwani – Speaking for the private banks in Singapore, China is front and centre as the dominant investment theme – it is obviously the next superpower. We are at an inflection point and, like it or not, the actions of Trump and Biden and the whole trade war rhetoric might delay the crowning of China by a couple of years, but China’s rise is inevitable. It’s the confluence of the largest group of dollar millionaires as well as economic activity and state-led investment, which is where economic growth is going to be witnessed, therefore, rightly, all global portfolios are increasing their allocation to China. It’s seemingly the safe bet. Funds Global Asia – Are you optimistic or pessimistic about the investment landscape both regionally and globally over the next 12-18 months? Coxeter – We’re optimistic, but we also acknowledge there’s a lot we can’t predict about the future, so in expressing that optimism in portfolios, we embrace concepts like diversification, agility in decision-making and flexibility to benefit from dispersion in outcomes. Although we expect weak economic activity over the next few months, over a one-to-three-year time horizon, we expect economies to be in the early to mid-stage of recovery, which tends to be pretty positive for risk assets, and that underpins our optimistic stance. As vaccines are rolled out, the combination of increasing herd immunity and warmer weather next spring should reduce the potential disruptions to economic activity. We also have considerable excess savings and pent-up demand which could be released by consumers, and businesses are in the middle of a restocking cycle as inventories are pretty low. Neither governments nor central banks will be in a hurry to withdraw policy support, and we think they’re likely to increase support in case of any temporary setbacks, which ultimately justifies lower risk premia for risk assets. We have been looking quite closely at China, and we really do expect larger strategic exposures to China in client portfolios. From a strategic positioning perspective, with bifurcation or emergence of regional blocs, important economic and corporate growth exposures may only be fully accessible via onshore Chinese assets. We think that China’s “dual circulation” economic strategy, which was first announced back in May of this year, is important as it pivots towards the domestic consumer market. Within typical emerging markets strategies, you’re largely getting the offshore China exposure, which is a slightly different opportunity set. Clients also look at the alpha and diversification opportunities of China, and that is a significant consideration in terms of deciding how to structure your overall portfolio; the prospects for excess returns there really are very good, particularly relative to some segments of developed markets where excess returns are extremely difficult to eke out. Alongside that, you’ve got improved access for foreign investors which is also helping facilitate larger exposures in portfolios. Goh – There are good reasons to be optimistic. The various drivers – whether it’s the macro, fundamentals, balance sheets, corporates, policies – they’re all pointing to reasons to be optimistic. We are leaning towards risk assets like equities and liquid alternatives where interesting opportunities that are uncorrelated to traditional markets beta and economic cycles provides genuine diversification to portfolios. While some parts of the credit spectrum look interesting, it’s a higher-risk spectrum that stands out with more excess premium there. We are cautious about what a potential rise in rates may mean in terms of shaving off some of those potential benefits by investing into higher-risk credit like high yield and emerging market debt. If you think about it in relative comparison based on our forecast, equities should move about 6% to 7% over the next three years and in relative terms to, say, a high yield market, you should be looking at around 3% to 4%, so relativity matters here, growth in the listed alternatives space is quite comparable to our expectations on equity markets. We have to pick our spots on certain areas, so 5G is more of a global play than a China play because China is still very dependent on some software and the design aspect of 5G that it’s trying very hard to get its hands on, so a global play on 5G is probably the better way to go. Jagwani – This is the time of the year when all of the major houses put out their forecast for the next year and across the board, they’re all looking very rosy because coming off a year like 2020, it’s hard not to be optimistic about the recovery. If you see the growth rates of GDP for 2021, whether you look at S&P or IMF, they’re roughly the same: 8.8% for India, 8.2% for China, Vietnam is about 6.7% and Indonesia and Malaysia are in the 7% range, so there is a fair amount of optimism, whether it’s restocking of inventories or resumption of trade, the Regional Comprehensive Economic Partnership (RCEP) and so on. So, Asean and Asia in general, by virtue of demographics and regional trade, look a little more exciting. There is a sense that fiscal stimulus is not delivering on the objective of creating more jobs, it’s going towards either increased savings or feeding people, so it is not really being put to regenerative uses, therefore it is not going to deliver the intended goods over the medium to long-term, and that remains an area of worry. Despite the rising debt levels, there is optimism about the next year just on recovery trade. I do worry about Brexit and the break-up of the EU in the next five years. Ban – Funnily enough, similar to what Simon said, we are early cycle, even though it does feel like one very long rollercoaster we’ve all been on. Early cycle is generally good for risk assets, so emerging market debt, credit, high yield, equities. If the time horizon is 12 months, I would say we’re generally pretty constructive on risk assets. For the next five years it’s social issues as well as wealth inequality – however, it’s going to come as a result of how governments handle the pandemic and stimulus, the response, whether or not that is sufficient and therefore leading to potential regime shifts due to social inequality. Choksey – From a business perspective, there is tremendous potential for cross-border collaboration, thereby changing the business models across the Asia-Pacific region as well as changing their distribution models for all by going down the path of digital distribution. That will also change the dynamics of fundraising and the operating model of the sales aspects of funds. New forms of business licences would also come out, so we predict that the operating model would change quite significantly here if the current plans that are underway take fruition and people pick up on that. © 2020 funds global asia

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