Siew Meng Tan, HSBC’S Asia Pacific head of global private banking, outlines the group’s huge investment in the region
also in this issue:
digital issue ∙ Sept - OCT 2021
Private bankers talk China DBS CIO taps disruptive innovators Crazy rich Asian IPOs Fund selectors' big bets Singapore's ultra-rich eye property
digital issue ∙ SEPT - OCT 2021
UBS’s Jansen Phee is a student of the art of humility
This issue is packed with interesting insights into how wealth managers are positioning for the next quarters to come. DBS Private Bank CIO Hou Wey Fook explains how investors can capitalise on the next wave of innovation with an IDEA framework designed for identifying companies that can emerge stronger in an era of disruption. As Private Wealth was going to press, China launched its long-awaited multi-billion dollar cross-border investment scheme. Fund selectors from Credit Suisse and The Bank of East Asia reveal how Wealth Management Connect is making a difference to their product shelves. Our private banker profile is Siew Meng Tan, HSBC’s Asia Pacific head of global private banking, who provides an inside look at how the group is significantly stepping up its ultra-high-net-worth capabilities with dedicated teams and new offerings. Private markets are playing a beneficial role in portfolios to achieve diversification and long-term returns for Indosuez Wealth Management and JP Morgan Private Bank, while Reyl Singapore is betting on specific thematic trends. Meanwhile, the super-rich have been taking advantage of low interest rates to buy luxury properties in Singapore. We speak to agents about some of the hot deals. Elsewhere, Indian equities have remained resilient through the second pandemic wave. Ajay Tyagi, winner of Citywire Asia’s best Indian equities fund manager award this year, discusses how he picks the best opportunities. Finally, UBS has identified the sectors that are best-positioned to capture opportunities in green hydrogen, and fund managers tell us how air-conditioning systems matter in the ‘E’ of ESG.
audrey raj, editor, citywire asia
Editor's note
PRIVATE WEALTH ISSUE 54
Private Markets China Thematics CIO View Private Banker Buyers' Market ESG Equities Star Manager Chart Fixed Income Property Ones to Watch
welcome
Private Markets
Two experts explain how both private equity and private debt can provide the resilience and diversification investors need in today’s uncertain markets Amid volatility in public markets and low interest rates, investors are wising up to the role private markets can play in portfolios to achieve diversification and long-term returns. ‘Generally, private equity’s illiquid nature has been a major advantage during the pandemic. The high frequency of crises or downturns and shortened economic cycles present opportunities for both managers and investors in the private equity market,’ said Arjan de Boer, head of markets and investment Solutions, Asia at Indosuez Wealth Management. ‘Private equity firms have delivered higher returns and lower volatility, outpacing most benchmarks of comparable public market performance through tough times. Their proven resilience in the face of downturns and continued momentum have prompted interest among investors and bankers to consider private equity for higher potential returns against an environment of sustained low-yield, expensive stocks and highly volatile bond prices.’ Over the last year or so, venture capital, private equity (growth and buyout) and private debt have been notable outliers, de Boer said. In Asia specifically, private debt, such as secondaries and mezzanine loans, has scaled up rapidly during the pandemic. ‘Finally, we have seen opportunistic interest from investors in distressed and special situation strategies,’ he added. ‘The rationale being that these funds’ J-curves are compressed and are regarded as an alternative to traditional fixed income. The expectations of returns from investors and proven returns on secondaries remain high, for example around 20% IRR [internal rate of return]. On the other hand, the IRR on private debt is comparatively reasonable at about 10%, but with a timeframe of five to seven years or shorter.’ Meanwhile, venture capital has shown the strongest performance since 2020, said de Boer, with quality underpinning portfolio companies achieving strong growth driven by outsized interest in technology and healthcare. ‘Technology is becoming more important for private equity investors, with digital innovation seeping into every sub-sector including fintech, medtech, edtech and consumer technology. In fact, many industries have fundamentally changed during the pandemic,’ he said. ‘Fund managers, therefore, need to have the knowledge to assess the underlying technology of the assets of a targeted company to properly underwrite the risk and have the expertise to deploy technology to extract the maximum value. Deep sector and sub-sector expertise has never been so important.’ An advantage for private capital is that tech companies like this route, as it enables them to delay going public. ‘Staying private for longer suits tech firms because small, rapidly-growing companies tend to have significant intangible assets. They do not want to disclose their early-stage research publicly and therefore favour a closed group of shareholders.’
by Neil JohNson, reporter
BACK TO TOP
Quality and growth tilt Credit Suisse is seeing a strong preference towards quality amid market volatility, said Salman Shah, the bank’s head of alternative fund solutions, private banking Asia Pacific. ‘Clients prefer established fund managers with a proven track record of navigating uncertainty, as well as growth sectors such as technology and healthcare that are expected to benefit.’ Semi-liquid private market funds are also increasingly popular with clients, as they provide exposure to private markets with some form of liquidity. ‘This is especially the case for private Reits [real estate investment trusts] and private credit as these assets offer higher, more stable yields compared with liquid markets, along with portfolio diversification,’ he said. Also in the name of diversification, Albert Yang, head of alternative investments, Asia at JP Morgan Private Bank, has noted strong demand for stable rental income in US commercial real estate assets, specifically in multi-family homes in second tiered cities, data centres and logistics warehouses. Furthermore, he has seen substantially higher demand for private investments and alternative-yielding investments such as commercial real estate and infrastructure over the last 12 months. On the other hand, real estate, usually a private equity mainstay, is an area de Boer highlighted as being lacklustre over the last year or so. ‘Fundraising and deal-making fell sharply due to the decrease in the price of real assets, as the degree of recovery within the asset class remains unclear, with uncertainty over the continued impact of the pandemic.’ Privately impactful Perhaps unsurprisingly at a time when the world needs all the help it can get, Shah has seen a sustained move towards impact investing. ‘For instance, in early 2021, we observed great interest in our innovative venture capital strategy that backs disruptive technologies aiming to reduce carbon emissions and therefore limit climate change.’ Credit Suisse has strategies in the pipeline aligned with the bank’s ‘supertrends’ framework. ‘These follow an impact private equity strategy that seeks to advance and democratise good health and wellbeing with an overarching focus on promoting affordability, innovation, access, and inclusion across four sub-themes to solve some of the world’s most pressing challenges in a post-pandemic environment,’ Shah said.
Salman Shah, head of alternative fund solutions, private banking Asia Pacific, Credit Suisse
Arjan de Boer, head of markets and investment Solutions, Asia, Indosuez Wealth ManagemenT
pRIVATE MARKETS
Albert Yang, head of alternative investments, Asia, JP Morgan Private Bank
china
Leading figures at two private banks tell us how they view opportunities in China as Wealth Management Connect comes into view, alongside regulatory crackdowns and the waning effects of Covid For most, China is a long-term story. Chinese equities are likely to benefit from strong earnings growth next year and the China onshore bond market is maturing. One development gaining a lot of attention is Wealth Management Connect (WMC) which will allow residents in Hong Kong, Macau, and major Guangdong cities to invest across borders. To find out how private banks are allocating to China and preparing for WMC, we gathered a panel of experts in June for an in-depth discussion. Here are some of the key takeaways from Charis Wong, head of fund solutions, Hong Kong, Credit Suisse and Jaye Chiu, head of investment products and advisory, The Bank of East Asia.
by Audrey Raj, editor
Charis Wong Head of fund solutions, Hong Kong, Credit Suisse
Jaye Chiu Head of investment products and advisory, The Bank of East Asia
How is Wealth Management Connect making a difference in your product shelf?
Charis Wong: When more details become available, there are likely to be significant opportunities to offer improved access through the Wealth Management Connect (WMC) programme. At that stage we will examine how to make use of the existing infrastructure. There could be initial discussions on quota restriction, operational mechanism, and suitability requirements. Over time, the increased flexibility to invest in cross-regional wealth management products and a highly regulated dual-control regime should bring investors a number of benefits. These include more protection, greater global access and better diversification. Jaye Chiu: The regulators have pointed out this is only phase one. In time, they are expected to open up more possibilities around the type of products WMC will be able to cover. Apart from mutual funds, we are expecting linked deposits, high yield bonds, private equity, and hedge funds to be included eventually. How the banks differentiate from each other will be based on a few factors. First, the digital platform for order execution. Trades on Greater Bay Area WMC are primarily execute-only, so a key differentiator will be how efficient banks are in helping clients place trades. The second distinguishing feature will be the type of investment content you'll be able to offer to clients and what value-added information you’ll be able to give both your southbound as well as your northbound clients. But perhaps the most important point is each client will only get one choice of banking partner for WMC, at least initially. So, it is important for any bank to be the most preferred banking partner from day one. You can expect a lot of promotions and marketing budget being spent on attracting clients.
Charis Wong: China demonstrated it was able to contain the virus in 2020 and maintained a high level of economic activity. We saw strong demand for China-related investments from the second half of 2020 to the first two months of 2021. Thereafter, policymakers decided to put out the fire as stock valuations became overheated. Credit Suisse has maintained a neutral/market perform weight for Chinese equities and we expect them to deliver a similar level of returns as developed market stocks for the rest of the year. Regulatory pressure in specific sectors such as the internet and after-school tutoring have also further dented market sentiment. This is set to remain a key overhang and driver of volatility for markets this year. Jaye Chiu: There have been a lot of digitisation initiatives to improve communication with clients. During the pandemic we have tried to leverage our offline branch network as much as possible. Last year, we set up a chief investment strategy team under the bank, and we have been providing house-view updates and investment content to both onshore and offshore Chinese investors. Our experience with mainland Chinese tells us that they like both local as well as international content.
Charis Wong: For a client with an Asia bias, we recommend they keep an allocation to China equities in their portfolio. Investment decisions can often be driven by short-term sentiment and dominated by a home bias – leading to an average overweight allocation compared with our recommendation. Jaye Chiu: We have a 15% allocation to emerging markets, including China and it's mostly within cyclical sectors. That 15% is more like a strategic allocation because we have changed a lot in terms of how we recommend investors put that 15% to work. For example, the Chinese government has introduced more long-term structural and financial reforms. When Covid-19 was still very much an issue in China, we advised clients to invest in a market recovery. We have since moved on and have been recommending themes such as carbon neutrality, ESG, green energy and domestic consumption.
Charis Wong: As the CNY outlook improves and our USD outlook points to medium-term depreciation, we have seen investors reallocating parts of their portfolio into CNY-denominated debt on the back of our house-view recommendation. This is the first big reallocation flow since the dim sum bond market boom in Hong Kong. For the second half, we still advise clients to rebalance their portfolios with an increased allocation to CNY bonds as we expect a return upside of around 5% over the next 12 months. These bonds’ defensive characteristics versus global markets should contribute to a favourable risk-adjusted return profile. There is also interest in unconstrained China fixed income funds, which can provide diverse opportunities to Chinese onshore and offshore fixed income markets. Jaye Chiu: We have also seen quite a lot of interest in onshore bonds. The search for yield will continue, amid expectations of rising interest rates. So, the chase for yields will drive investors to Chinese bonds, especially onshore ones, which tend to offer higher yields. Even though the default rate is quite low, we do see potential traps in some sectors, especially those that are high yield leveraged. We have been advising our clients to go into Chinese bonds in a diversified manner, employ an active manager where possible, and to reduce concentration in single issuer/issue risk.
How has Covid changed how you recommend investments in China?
How much China exposure should investors have in their portfolios?
Where should investors be looking for diversification and yield in China’s bond market?
cHINA
THEMATICS
Many investment trends were kick-started by Covid but which ones will carry on post-pandemic? Specialist investors give their long-distance tips The latest report from the Intergovernmental Panel on Climate Change was unequivocal — we’re damaging the planet — setting the stage for a make or break COP26 in November. It’s therefore safe to say that climate change, clean energy and carbon neutrality will remain strong themes in a post Covid-19 world. But what about the themes that were boosted by the pandemic — will their glow fade? Were there any flash-in-the-pans? Are there any themes arising as we transition, albeit tentatively, to some form of normal? ‘The digitalisation theme, which had already started pre-pandemic, significantly grew in importance as companies had to accelerate their plans to pivot their businesses as people were stuck at home,’ said Daryl Liew, CIO at Reyl Singapore. ‘This theme is one that saw us invest in Asian companies with emerging technologies that have the potential to change their respective sectors.’ A closely related theme that Patrick Ho, CIO, North Asia, private banking & wealth management at HSBC, believes has come further to the fore is cybersecurity. ‘We have heard a lot more about cybersecurity incidents, partly because businesses and individuals have more extensive use of remote connection and services, including clouds, remote access to company networks, ecommerce and fintech.’ Ho highlights the strong performance of cybersecurity ETFs, which have ‘delivered a total return of around 60-80% since the beginning of 2020, much better than 33% from the global equity market’.
by Neil Johnson, reporter
New themes The pandemic has certainly been a catalyst for some already healthy themes, but there are also a few that have sprung up recently that may have taken more time to emerge. Deglobalisation, for example. ‘Perhaps a new issue that cropped up because of the pandemic is the increasing importance for countries to develop supply chain independence for strategic products including food security. This will likely spur governments to invest in these strategic sectors to ensure they will not face shortages in a crisis,’ said Liew. Within this area, Wolf notes an uptake in automation. ‘Automation has been another theme we’ve focused on. Driven both by supply chain localisation, as well as labour shortages, we’ve seen an increase in capital spending on robotics and expect that to continue.’ Clients have also started showing more interest in crypto assets over the last year, according to Liew. ‘The popularity of crypto assets and digital currencies has definitely garnered client interest especially as crypto assets enjoyed a spectacular rally in 2020. Increasingly, crypto assets have also started to attract institutional investor interest, which is a sign that these investments could have staying power.’
Renewed focus on ESG Meanwhile, the importance of ESG has risen significantly as a result of the pandemic. ‘It was certainly important before, and one could argue we’d be in the same spot regardless of the pandemic, but the increased focus on the environment and sustainability from the perspective of the public, governments, media and corporates has increased noticeably,’ said Alex Wolf, head of investment strategy for Asia at JP Morgan Private Bank. To this end, JP Morgan Private Bank has focused on decarbonisation as a theme, looking at both renewables and electric vehicles. ‘Decarbonisation is a long-term structural shift. Governments are now just beginning to focus efforts on clean energy and reducing carbon emissions. With most governmental targets set decades out from now, this transition will well outlast the pandemic. ‘Somewhat related, food technology is also something that is likely persist as a focus area. With the effects of climate change putting more pressure on food production, investment will increasingly focus on sustainable food technologies,’ Wolf said. The renewable energy theme is also being driven by governments enacting new regulations and policies to achieve carbon neutrality. For example, China’s Politburo meeting in July reiterated the importance of attaining carbon neutrality. In the US, the Securities and Exchange Commission is in the process of prioritising ESG disclosures. ‘The European Commission proposed a carbon border adjustment mechanism, which is basically a form of carbon border tax in our view. Under the mechanism, the EU will tax their importers based on the carbon emissions of their goods using the EU carbon prices. Although this could be challenged by other countries, we think the direction of more regulatory and tax regime changes to facilitate carbon neutrality will continue,’ Ho said.
The big reopening An obvious new theme will be economies reopening. ‘It appears that people are looking forward to going back to some form of normality in their lives as economies reopen, hence consumer services like travel and in-person experiential events will likely be in huge demand,’ said Liew. Meanwhile, Wolf thinks there could be a re-think around international travel and tourism. ‘Throughout the pandemic travel has been severely curbed leading many to see their own country or surroundings in a new light. With cross-border restrictions (or quarantine measures) likely remaining for some time, we could see more of a focus on domestic travel and tourism.’
Alex Wolf, head of investment strategy for Asia, JP Morgan Private Bank
Patrick Ho, CIO, North Asia, private banking & wealth management, HSBC
Daryl Liew, CIO, Reyl Singapore
CIO View
by Hou Wey Fook, CIO, DBS Bank
We live in a world where change is a constant. Over the past century, we have witnessed a series of revolutions – from the rise of American hegemony after the Second World War, to the rapid emergence of China as a superpower in the globalisation age. Today, we are again on the cusp of another transformation as digitalisation of the world takes hold. Global digital disruption has already changed how we live and how global businesses operate, but this is only the beginning. The biggest technological innovations in the last decade have been mobile internet connectivity and e-commerce. Operating in a ‘borderless’ world, e-commerce has transformed how traditional businesses operate. However, with the former becoming commonplace in our everyday lives, the time has come to ride the next wave of advanced technological innovation. Why innovation matters In the 21st century, the pursuit of innovation is paramount to a company’s survival. A report from Boston Consulting Group shows that innovation translates to stronger top-line performance and this is likely to explain the strong showing from the New York Stock Exchange R&D Innovation index over the years. Since 2000, it has rallied 449%, outperforming the Nasdaq Composite index. To position for an ever-changing world dominated by digital disruption and evolving demographics, investors should seek exposure to innovative and cutting-edge industries, such as blockchain, big data/artificial intelligence, electric vehicles, robotics, 3D printing, cloud computing, internet of things, and life sciences. Today’s winner, tomorrow’s laggard In today’s fast-transforming economy, what are deemed blue chips today could turn out to be laggard performers tomorrow, or worse still, disappear into obsolescence. Being mindful of the rapid changes happening around us, our approach to investing must evolve. Instead of analysing a company through the static lenses of prevailing financial ratios and market positioning, we should also look forwards. The key questions to ask are: Is the company operating in a growth industry and is it innovative enough to disrupt and gain further market share? For a company operating in a mature industry, how serious is the threat of disruption? Is the management forward-thinking enough to reinvent itself? With these questions in mind, we have created an IDEA framework for identifying companies that can navigate and emerge stronger in an era of disruption. The IDEA acronym breaks down into the following: ∙ Innovators - companies that create new products and services to displace incumbents. ∙ Disruptors - companies that do things differently to challenge the status quo. ∙ Enablers - companies that empower innovation and disruption to be successful. ∙ Adapters - companies that successfully adapt and transform to ride new business trends The hunt for companies jumping multiple s-curves In addition to adopting an IDEA framework for stock selection, we also keep a lookout for companies that display a strong track record of scaling multiple financial s-curves. By definition, the s-curve refers to a path whereby companies start operation and undergo sharp expansion, before peaking off as the market matures. Companies can avoid such endings by jumping onto a new s-curve, but few manage to do so. There are, however, exceptions. The hallmarks of a typical high-performance company scaling multiple s-curves include (a) Great leadership, (b) Strong culture of innovation, and (c) Consistency in outperforming industry peers in both growth and profitability. These are the traits and characteristics that we keep a lookout for in our stock selection process. Investment conclusion In a world undergoing massive digital transformation, change is a constant. Therefore, companies need to adapt when they can, and not when they must. To navigate such an environment, investment portfolios should: ∙ Gain exposure to industries that ride the disruption wave successfully. ∙ Within these industries, gain exposure to companies with unique characteristics that allow them to stay ahead of competitors. In particular, focus on companies possessing a strong track record of jumping across multiple s-curves. Our IDEA framework – focusing on innovators, disruptors, enablers, and adapters – is central to this winning strategy.
DAVID CZUPRYNA Head of ESG Development at Candriam
Siew Meng Tan, HSBC’s Asia Pacific head of global private banking, talks about the group's bold, multi-billion strategy for expanding its footprint in the region Top business leaders would say investing in people is the best decision a company can make, but these days, spending on technology would surely come a close second given its essential role in providing a competitive edge. HSBC plans to do both and is ploughing $3.5bn into technology and people over the next five years. This multi-billion investment is being used to accelerate the growth of the group’s wealth and personal banking business in Asia – a region that generates half of its $1.6tn wealth balances and 65% of the group’s wealth revenues. ‘For private banking, we have a bold and clear growth strategy. Our ambition is to become the world’s leading private bank for Asian, international, and HSBC-connected clients,’ Siew Meng Tan, Asia Pacific head of global private banking tells Citywire Asia. ‘HSBC has earmarked a third of its investments in private banking in Asia to expand onshore private banking capabilities in mainland China where it plans to extend its presence beyond Shanghai, Beijing and Guangzhou in the next five years,’ Tan says.
by audrey raj, editor photos by Nathan King, LHA
Private Banker
private wealth issue 54
In addition to expanding its wealth teams, the group is increasing its distribution in Hong Kong, mainland China, and Singapore. It is also enhancing its digital wealth offering across the region and plans to develop new products, particularly for high-net-worth (HNW) and ultra-high-net-worth (UHNW) clients. More than 5,000 customer-facing wealth hires are on the cards, including relationship managers, investment counsellors and specialists to better support wealthy clients in Hong Kong, Singapore, and mainland China. ‘We are significantly stepping up our UHNW capabilities with dedicated teams,’ Tan says. ‘Right now, HSBC is on target to add more than 1,000 roles to its wealth management business in Asia by the end of 2021. ‘This also includes plans to recruit up to 3,000 wealth planners to scale the group’s new mobile wealth planning service in mainland China, which was launched in mid-2020 to reach new clients outside of the branch network.’ The group plans to double the number of relationship managers and investment counsellors in its onshore private banking business in mainland China, as well as scale up Singapore as a key offshore hub for Asean and Middle Eastern clients. HSBC’s Asian wealth balances reached a high of $810bn in the first of 2021, accounting for around 49% of its global total. This was on the back of net new money inflows in the first six months of 2021, including $9.3bn to global private banking in Asia. Overall, private banking client assets in the region rose 25% year-on-year to $193bn, while the number of affluent and high-net-worth clients rose 7% year-on-year to 1.7 million. ‘Over the past two years, client assets in mandates have increased by almost half as we continue to invest in our advisory capability,’ Tan says. Land of smiles Thailand isn’t a new market for HSBC. According to Tan, HSBC was the first commercial bank in Thailand, introduced the country’s first bank notes, financed its first foreign loan, and most recently launched the first sustainability-linked loan and green deposits into the Thai market. Earlier this year, the group unveiled an onshore private banking business in Thailand, which is its second onshore presence in Southeast Asia after Singapore. Designed to give Thai clients access to international capital markets, the team in Thailand covers client management and advisory services, while clients’ assets are booked in Singapore. Tan says rising wealth in Thailand is changing investor behaviour and preferences, which offers HSBC the opportunity to use its network and expertise to tap into the market. ‘In Thailand and across Asean, private wealth is closely tied to business endeavours, and the strengthening of intra-regional trade is expected to accelerate international expansion and wealth flows, even in the aftermath of the pandemic. ‘Thailand is key to the group’s Asia-pacific and Asean growth strategy,’ she says, adding that the group’s one-bank approach will be a key advantage in enabling it to offer private wealth services to Thai clients, especially in the areas of growing, managing, and preserving wealth now and for generations to come.
Record raise Last year, the private bank raised more than $2.3bn in alternative investments from clients globally in the wake of the global pandemic, compared with $1.2bn in the previous year, signalling an increasing interest for such investments. Tan says nearly 60% of the global alternatives inflows were contributed by clients in Asia, with a record raise of $1.34bn in total. She adds that the private bank continues to see broad opportunities for alternative investments and considers them a key portfolio diversifier that provides downside risk protection and uncorrelated returns. Over the last year, HSBC has offered solutions such as its flagship private equity programme, which is a customised discretionary portfolio of primary, secondary and co-investment deals. It has also rolled out a thematic tech buyout fund, a global real estate debt fund, an opportunistic private credit fund and a North American buyout fund. ‘We offer clients exclusive access to the best-in-class managers,’ Tan says. ‘For example, we partnered with a leading private markets manager to provide a bespoke credit dislocation special situations solution for clients, taking advantage of the idiosyncratic opportunities that have emerged from the pandemic.’ Tan believes there is a growing universe of private market opportunities, as more companies are choosing to stay private for longer, than ever before. ‘We believe private markets are complementary to clients’ public market holdings and expect the private market illiquidity premium to continue to attract investors, and fundraising momentum to remain strong,’ she says.
Tech up HSBC has been boosting its tech capabilities as well. In the last two years, the private bank has invested about $100m in Asia and plans to invest another $100m in the next two years covering core banking and digital platforms. Its most recent addition is the HSBC GPB Chat, a messaging platform for clients to chat with their relationship managers and share documents through WhatsApp and WeChat. The private bank also launched an online trading platform, which offers clients trading access to 10 key financial markets in Asia, Europe and the US. Using mobile phones, clients can trade up to $2m per transaction and up to $10m daily. Tan says the new feature offers clients direct access to cash equities and exchange-traded funds at the touch of a button and allows them to track investments in real-time. HSBC plans to progressively expand the range of investments on the platform to more complex trades by 2022. ‘We also launched our new internet banking website and mobile app, which readies us for seamless interoperability between digital channels, including integrated and direct client communication, and investment knowledge and research platform,’ Tan says.
Much of the earlier fretting about rising inflation has died down but it still pays to be prepared. These investors reveal how they are positioned for various inflation scenarios and the strategies they recommend for clients
The reopening of the US economy has raised inflation to its highest levels in three decades as supply struggles to keep up with demand over the summer. But the Fed views this year’s inflation jump as only transitory until supply catches up with demand. Surging goods prices are likely to ease as near-term bottlenecks diminish. Therefore, the Fed is unlikely to induce another taper tantrum this year by prematurely tightening monetary policy, as inflation looks set to fall back towards the central bank’s 2% target over the rest of 2021 and 2022. That said, inflation is unlikely to be as subdued as it was in the decade after the 2008 financial crisis. Instead, the transition to a post-pandemic world of faster growth, higher government spending and less-dispersed supply chains makes it more likely that inflation will stay elevated in future, at or above central banks’ 2% targets. Looking ahead, we expect modest increases in rates in an environment of still-robust economic growth and manageable inflation. Under this scenario, we see a positive outlook for global equity returns over the next 12 months, albeit lower versus the last 12 months and with a greater scope for near-term volatility. In addition, inflation will remain a key theme for commodities given that commodities are one of the few reliable inflation hedges available to investors. While concerns over the sustainability of the commodity rally have increased, fundamentals generally remain strong.
Eli Lee Bank of Singapore Singapore
Claude Harbonn Credit Suisse Singapore
Inflation concerns have been at the forefront of investors’ minds this year. Credit Suisse believes that the current short-term overshoot will recede and expects more durable inflationary pressures in markets where the recovery is most advanced. The short-term spikes in inflation can trigger corrections that should provide trading and entry opportunities. Within equities, we prefer sectors like materials and financials that either benefit from the drivers of inflation or from higher rates. We are also recommending our clients increase their allocations to Europe as it is less sensitive to inflationary pressures and looks attractive in relative terms. As for fixed income, we prefer actively managed vehicles that offer a high level of diversification as well as the ability to react quickly to interest rate swings. Developed market government bonds appear unattractive, although we still see value among selected Asian corporate bonds. Inflation concerns coupled with very low bond yields have created significant demand for alternative sources of yield and return. There is strong interest in private market solutions in both consumer and private credit, as well as real estate, that offer higher yields compared to typical fixed income and provide hedging against higher inflation or rates.
Adrian Zuercher UBS Global Wealth Management Hong Kong
The world economy is reopening, and the level of US inflation has been higher than Fed officials expected. The majority of FOMC [Federal Open Market Committee] members believe inflation risks are tilted to the upside. The latest US Consumer Price index (year on year) is at 5.39%, compared with 4.99% last month and 0.65% last year. However, we don't think near-term inflation data will force the Fed to tighten policy earlier than expected. We share the Fed's view that inflation is likely to be transitory, evidenced by the latest ISM data where the sub-component indicates a peak in price pressure. Even so, we believe it is prudent for investors to build some inflation protection into portfolios to preserve their purchasing power over the long term. Those seeking such protection could consider stocks with pricing power, commodities - including oil - and private market infrastructure investments.
Julien Collin Indosuez Wealth Management Singapore
With the US Consumer Price Index jumping to decade highs, it will be critical to watch the pathway and persistence of inflation. We believe the mix of monetary and fiscal support remains supportive globally, which will continue to underpin the growth recovery path. We remain broadly constructive on equities with high selectivity, favouring companies with strong pricing power. We are also taking a balanced approach in our equity portfolio, positioning between secular growth and value themes in equities. The biggest ‘enemies’ for fixed income products, traditionally, are inflation and interest rates. After a rate surge earlier this year that spooked markets, yields have fallen back sharply as the market has switched focus from inflation and rates worries to the resurgence of the pandemic, and from the rapid burst in post-pandemic activity to a potential slowdown. The bigger fear for now, is not inflation but stagflation — higher prices plus lower growth. At below 1.3% and 2% (at this point of writing), the 10-year and 30-year yields are not expressing a lot of confidence in the future growth trajectory. If policy failure results in inflation that is not transitory in nature, and reflation trades do not materialise, we will be watching tighter credit risks instead of rates. Stagflation is never good for corporates or the economy as a whole. High yield credits will have to be more selective as part of portfolio picks. A flight to safety will support investment grade names, and duration risks might have to take a backseat, at least in the intermediate term. If inflation is moderate relative to growth, then the need for portfolio carry might point to high yield selections over investment grade credits. This has been our strategy for the good half of this year and we believe interest rates will continue upwards, but at a more moderate pace for the rest of 2021, with the US Treasury 10-year ending the year between 1.5% and 1.8%. As such, we prefer to maintain an underweight position in dollar duration, with a continued preference for spread carry amid the expected increase in underlying Treasury yields.
Han van der Dong The Global CIO Office Singapore
Our central case for inflation is that it will return higher post-Covid than before, without necessarily ending in runaway inflation. Inflation has been on the rise this year and is expected to possibly ease a little, but not below central bank targets, with a risk of actually remaining noticeably higher for some time to come. The implication for asset markets is that fixed income returns will be challenged, as this scenario will require yields to rise. For income-focused investors, the clear action to be taken is to reduce duration exposure. Credit funds therefore become more important in allocations, and this, in turn, implies a greater focus on the due diligence process on underlying managers, as new areas of credit become available in the search for yield. In equity markets, normal inflation requires a shift from outright growth stocks towards more old-school sectors such as industrials and materials, and possibly healthcare as a defensive play. From a regional point of view, higher commodity prices, if sustained, could provide some upside to emerging market equities relative to developed markets. The latter is a longer-term play to consider, given that the shorter-term outlook for emerging markets still appears to be quite challenging in the context of the delta variant. We have also added to our positions in real assets, infrastructure and utilities.
Gareth Nicholson Nomura Singapore
Inflation is the wildcard, the potential game changer. Last year’s Covid-19 shock to the labour market and supply chains, together with unprecedented global macro policy easing, means it’s hard to know whether the economy is experiencing short bursts of high inflation or entering a phase of more prolonged price pressures. This is important, as a lack of inflation has allowed ultra-easy monetary policy to fuel the rapid recovery and bubble returns of recent years. We believe inflation holds the most sway today in the potential shift of this key driver. Our base case is a moderation of inflation into 2022, supporting higher real yields and sectors traditionally correlated such as financials, industrials, energy and materials – selection remains key. For bonds, the headwinds are strong, but we see interesting short duration strategies focusing on callable bonds. A risk is inflation may not be as transitory and policy normalisation not as gradual. Hot housing markets, longer-lasting supply chain bottlenecks, and new Covid waves in key industrial hubs like China and Vietnam all pose risks to the transitory narrative. As such we also encourage a portfolio approach including best hedge fund/alternative solutions and themes aligned with unstoppable trends around rapid urbanisation, climate change, social and demographic change, emerging global wealth and technological breakthrough.
Buyers' Market
buyers' market
by Jill Wong, SENIOR REPORTER
The air-conditioner is something that environmentally-conscious consumers hate to love. It is also a showcase of how ESG fund managers view carbon-intensive industries in transition The heat gets in, we reach for the remote control and turn up the air-conditioning. In Asia’s hottest cities, air-conditioning is an example of the conflict between practical and environmentally-conscious consumerism. As much as we want to consume responsibly, most of us have rejected the option of suffering in the heat. Air-conditioners are both a necessity and an opportunity. The former prime minister of Singapore, Lee Kuan Yew, attributed the country's economic success to air-conditioners. Virtually every built-up space is air-conditioned. The environmental impact has become less of an issue because investments have shifted to the technology and research around innovative energy-efficient air-conditioning systems. ‘Being based in Singapore, I don’t think we can conceive a world where there was no aircon,’ said David Smith, senior investment director at Aberdeen Standard Investments. ‘I don’t think we will say we won’t invest in air-conditioners because that would mean compromising the "S" in ESG, which is sustainable job creation and employment, in return for advances in "E", Smith added. Fund managers see a case for engaging with property owners who have helped drive innovation in air-conditioning systems. An example is Singapore’s underground district cooling network in Marina Bay, developed by SP Power. It pipes chilled water to buildings, resulting in energy savings of more than 40% compared with conventional central air-conditioning systems. ‘That’s an interesting technology advance in itself,’ Smith notes. India Alexander Davey, global capability head for active and quantitative equity at HSBC Asset Management, has his sights set on India. Air-conditioner ownership in the country reached 7.2m units in the financial year to 30 March 2020, a 700,000 unit increase from the previous year, according to data firm Statista. ‘You have to trade off between what is achievable versus what is necessary for the development of the economy. So that’s an area we look at very closely and engage with the company,’ said Davey. Stephen Liberatore, portfolio manager and head of the ESG and impact fixed income strategy team at Nuveen, agrees that India’s market for air-conditioners is massive, but the opportunities offered by Indian solar companies should not be overlooked. India’s sunny weather makes the country an ideal location for solar power generation and achieving energy efficiency. ‘There’s opportunity to take advantage of it in a way that helps to produce power, reduce cost, and provide an economic benefit by allowing India to rely less on imported oil, which would strengthen the country by becoming more energy independent,’ Liberatore added. As an example of innovation, Liberatore points to an investment made by his core impact portfolio in the OBP Depositor LLC Trust 2019-OBP. The $902.5m commercial mortgage pass-through certificates deal financed One Bryant Park, a 51-story Class-A office building in New York whose central features include an under-floor air system with 95% filtration that releases air exhaust that is cleaner than the air entering the building. Thermal ice-storage in the cellar produces ice at night, which reduces peak energy demand. Hitting the sweet spot When it comes to engaging with carbon-intensive industries in transition, Liberatore said today’s ESG investing culture is no longer driven by negative screening and exclusions; it emphasises inclusions and constructive engagement with companies around the energy supply chain. ‘What we do for carbon-intensive industries is really no different from what we are doing for all industries; we are creating a universe of issuers that are ESG leaders. If we invest in carbon-intensive issuers, they have to fit our definition of ESG leaders,’ he added. Ninety One CEO Hendrik du Toit said net-zero targets must reward both improvement and end-states, rather than just the latter. ‘To do this, they need to be calculated in a way that does not drive capital away from the sectors and regions that need to transition,’ du Toit said. Oil and gas companies will be the most impacted by the transition from fossil fuels into renewable energy after 2024, when the cost of manufacturing electric cars reaches parity with conventional cars. Singapore is aiming to make electric vehicles more attractive and phase out internal combustion engine vehicles by 2040. ‘Closing whole fossil fuel plants when they become obsolete or come to the end of their life and making long-duration investments into renewables takes time. It’s not really a space for the impatient investor,’ Smith said. ‘You want to invest only in oil and gas companies that are good stewards of the environment,’ Liberatore added. Conviction Investments in carbon-intensive industries in transition requires conviction on the part of investors that these companies are making strides to decarbonise and have strategies to deal with stranded assets. Evonne Tan, head of Barclays Private Bank, Singapore, said that irrespective of the nature of business, the bank takes the same approach to getting clients equipped with knowledge of the material ESG risks for each sector and helping clients make informed judgements about how well a company is managing these risks. ‘One way to approach this is to conduct analysis of a company’s internal operating practices across every sector, whether it’s an oil and gas company, fashion brand or clean technology company,’ Tan added. Sustainable financing for carbon-intensive industries in transition is a logical call for Helge Muenkel, managing director and head of Asia Pacific, sustainable finance and global capital markets at ING Bank. The firm had acted as a coordinator in a sustainability-linked loan to Singapore-headquartered oil product tanker company Hafnia, which has identified UN Sustainable Development Goal 13 (Climate Action) as a cornerstone of its sustainability strategy. Muenkel said the steering of the firm’s $850bn global lending book is guided by the EU Taxonomy, a European regulation that defines what economic activities can be considered sustainable. ‘But the different states of play globally require some flexibility that allows to us help our clients transition to lower carbon business models across the globe,’ he said.
ESG
esg
Step aside, China’s billionaires. Southeast Asia’s new-generation technology start-ups are the new IPO darlings Vision and good fortune underscored the phenomenal success of Singapore’s Sea. Riding the global technology rally on the New York Stock Exchange, the gaming company and owner of online shopping platform Shopee, grew from $4.35bn at the time of its 2017 listing to $155.73bn as of August 2021, almost three times that of DBS Group’s $57.7bn. Sea showed Southeast Asia’s tech entrepreneurs that the region’s underpenetrated markets offer huge opportunities. Covid-19 forced many companies out of business, but the lockdowns and rules on social distancing changed consumption patterns; social media, e-commerce and financial technology replaced traditional retail shops, restaurants and banks. Chen Zhikai, head of Asian equities at BNP Paribas Asset Management said that by focusing on the domestic consumer, Asian e-commerce start-ups have been able to replicate the early success of Chinese tech enterprises. ‘There has been an evolution in terms of the companies now available for investors to invest in Asia,’ he added. ‘That is allowing investors to get exposure to some of the structural changes we are seeing in Asia in terms of how people consume and interact on a day-to-day basis,’ he said. The success of e-commerce firm Bukalapak’s initial public offering (IPO) has shown that investors will pay a premium to access Indonesia’s fast-growing domestic consumer markets; the shares jumped 25% on their first trading day on 6 August 2021, breaching the price range accepted by the exchange and triggering its auto rejection mechanism. Meanwhile, South Korea’s Kakao Bank’s share price shot up 80% on 6 August 2021 when it became the country’s first digital bank to go public. In India, shares of food delivery firm Zomato, whose $1.3bn IPO was 40 times subscribed, rose 65% to $1.69 on their trading debut on 23 July 2021. Asian IPOs are on a roll. Singapore ride-hailing company Grab is expected to go public in the US in the fourth quarter of 2021 through a merger with special purpose acquisition company Altimeter Growth. Indian tech start-ups expected to launch IPOs in the coming months include One97 Communications, which operates the Paytm digital finance app, digital payments platform One MobiKwok, and online cosmetics shop Nykaa E-Retail. India’s API Holdings, the parent of online pharmacy PharmEasy, and PB Fintech, the parent of insurance aggregator Policybazaar.com, are also said to be considering listings. Potential vs valuations Yasmin Chowdhury, a senior emerging markets analyst at Federated Hermes, said Asia is a thriving hub with more than 50 tech unicorns that are growing significantly on the back of factors such as increasing internet penetration, rising incomes, convenience and efficient logistics driving adoption and growth. ‘The pandemic has further boosted digital adoption, wallet share and frequency, helping to improve the unit economics and in turn, the stability of these companies,’ she said. Chowdhury sees good opportunities across most sectors in the start-up space and particularly likes themes the pandemic has pushed to the forefront of the digital ecosystem, such as e-grocery, food delivery, ed-tech and gaming. ‘Within these sectors, we prefer established market leaders trading at an attractive valuation,’ she said. ‘These tech start-ups are going to shake up the whole make-up of the Indonesian stock index,’ Chowdhury added. ‘In fact, the IPOs of all the upcoming tech start-ups will add to and enrich the Asian tech investable universe.’ Indonesia’s GoTo, the super app born of the merger between ride hailing firm Gojek and e-commerce platform Tokopedia, is said to be targeting a $40bn valuation from an IPO that would raise $1-2bn. ‘Although valuations for some of these IPOs are high, the sector will get attention given the growth exposure it provides,’ said Chowdhury. Asian tech start-ups are also targets of private equity and venture capital. Sandeep Patil, a partner of fintech venture capital firm QED Investors, who oversees investments in India and Southeast Asia, said his firm is looking to bring its expertise and experience to help Southeast Asian entrepreneurs become the next generation of category leaders. ‘With strong tailwinds of rising economic prosperity, internet and ecommerce penetration, and attractive demographics, Southeast Asia presents a tremendous opportunity for innovation and growth of lending, insurance and other financial services,’ he added. Challenges, competition and risk Pruksa Iamthongthong, senior investment director, Asian equities at Aberdeen Standard Investments, is equally excited by the opportunities coming through the Asian IPO space, including the small caps in Singapore and Malaysia. The large domestic markets of Indonesia and India may have bred start-ups with business models that look similar to China’s, but they have unique challenges. ‘Food delivery in China is a convenient and cheap choice; in India, it’s a premium choice. How do they break the economics down and make it work? We see growth potential if they get the economics right,’ Iamthongthong said. Getting the economics right will be a start given that most of these start-ups have yet to make a profit; India’s Zomato reported a Rs356 crore ($47.8m) consolidated net loss for the first quarter to end-June 2021. There is a chance these companies may fail to grow and monetise their user base to the levels implied in their premium valuations. Additionally, there is a risk of speculative bubbles building if start-ups become more aggressive in their fundraising and marketing strategies. ‘The prospects of large conglomerates launching super apps, a one-stop shop covering varied digital needs, could potentially disrupt multiple players in the market,’ Chowdhury said. Regulatory risk should also be watched. ‘We have already seen this play out in China where it has strengthened regulatory scrutiny over several of its technology giants across multiple sectors leading to sharp declines in their share prices,’ she added. In India, regulators have proposed a ban on flash sales advertisements by large e-commerce players, as well as sponsored advertisements and the sale of private label goods from related parties. If passed, these regulations would impede the companies’ ability to monetise their user base. As these fast-growing digital ecosystems gain scale and complexity, the push to protect consumers and smaller local players may become a bigger theme. Therefore, it would be prudent to keep a close eye on the regulatory space, Chowdhury said.
Equities
equities
by Neil Johnson, REPORTER
Award winning Ajay Tyagi reveals how he identifies India’s best investment opportunities by focusing on the intersection of quality and growth Aristotle said that quality is not an act, but a habit. The 10,000 hours of practice theory suggests that anyone can become an expert. The point being that to be good at something requires steady, purposeful graft, as opposed to Hail Mary moves or lurching reactions. Winner of Citywire Asia’s best Indian equities fund manager award this year, Citywire A-rated Ajay Tyagi, head of equity at UTI Asset Management, is to date a one-team player, recruited out of university in 2000 into UTI’s equity research department. ‘While stock markets always excited me, it was only after landing at UTI that I realised what it takes to be a successful investor. The unique pole position of UTI in Indian markets accelerated the learning process and within a few years it was very clear that this is where I was going to build my career,’ he says. ‘The most stimulating part of being an asset manager is the ability to learn new things every day. We get an opportunity to be in close touch with the finest brains in corporate India to understand their business models and strategies. In a young and vibrant economy like India, witnessing the evolution of new sectors and new business models is the icing on the cake.’
Star Manager
Reasons to be cheerful In terms of economic and corporate momentum, India is recovering well from the pandemic’s major blows. ‘India has been, and continues to be, one of the most favoured investment destinations for global investors on the back of its sizeable demographic advantage, steady economic growth and rising income and living standards. It has all the key ingredients in place to deliver consistent growth for many years to come,’ Tyagi said. Within this bright future, ESG is expected to play an ever-increasing role, as stakeholders, shareholders and a younger generation of business owners see the long-term value in best business practices, against a backdrop of large corporate failures and scandals. Furthermore, new regulations are forging better governance standards in the areas of female representation at board level, auditor rotation and greater levels of disclosure. Over the last year, UTI announced its responsible investment policies, as well as committing to a screening criteria that will limit and exclude stocks related to coal, fossil fuels, alcohol, tobacco, gambling, weapons, companies guilty of violating human rights, including child labour, and those involved in pollution and systemic corruption.
Tyagi's fund has strongly outperformed over five years...
...and is equally strong over three years
The quality-growth sweet spot For Tyagi, the quality of a business lies in its ability to grow for an extended period of time and for its strong cashflow to be a creator of economic value. ‘Quality signifies the ability of a business to sustain high return on capital employed (RoCE) or return on assets (RoA). Truly high quality businesses are those able to generate high RoCEs and/or RoAs even during difficult times for their industry or sector and therefore operate above their cost of capital at all times,’ said Tyagi. For growth, he prefers steady and predictable, rather than cyclical and volatile; the kind that allows him to understand long-term drivers and better predict outcomes. But it’s the intersection of quality and growth that interests him most. This is the sweet spot, or as he puts it, 'the strategy’s favourite hunting ground for stock selection’. In a period in which Indian equities have been flying, the hunting has been particularly good. In the year to the end of June, Tyagi’s $890.5m UTI India Dynamic Equity fund grew 69.3%, well above benchmark MSCI India’s 57.0%. Portfolio performance was boosted by overweight positions in pharmaceutical, IT and healthcare services sectors, as well as quality stock selections in the consumer services, industrial manufacturing and consumer goods sectors. Notable contributors from the IT overweight include Larsen & Toubro Infotech, third place in the fund’s holdings with 4.35%, Mindtree at eighth with 2.97% and Info Edge India at ninth with 2.83%. ‘Being a leader in IT services and housing the sector’s top global companies is a natural advantage for India when it comes to the tech industry. It’s for this reason that the country is ranked fourth globally in terms of unicorns,’ he said. ‘We are constantly analysing this space and looking for business models that can scale up profitably and create lasting value. We already have a few technology businesses in the portfolio and could potentially own more as many exciting businesses come up for listing over the next couple of years.’ India is home to some very attractive sectors, but Tyagi’s bottom-up philosophy means sectoral weightages are an outcome of stock selection rather than a sectoral view. Favouring businesses that create economic value by way of generating high RoCEs and high cash flows means the portfolio consists of companies from the consumer goods, IT, pharmaceuticals, private sector banks and autos sectors, but not from metals, oil & gas, utilities, real estate and infrastructure, in which he struggles to find strong economic characteristics. This approach has served him well in 2020-2021. ‘Because of the focus on quality attributes and strong balance sheets with low-to-no debt, the portfolio, by design, is very resilient and can survive sudden economic shocks. Weak businesses don’t find a place in our portfolio anyway and, therefore, we had to do very little tweaking over the last year,’ he says. ‘The pandemic has only highlighted the strength of the strategy and we do not envisage any change.’
Five-year figures show Tyagi takes relatively less risk
Source: Morningstar Direct
(performance as % total return in INR)
Tyagi has recently moved up the ratings
Source: Citywire
star manager
The production and use of green hydrogen is gaining momentum, and could benefit many sectors Green hydrogen, also known as the fuel of the future, is hydrogen made without fossil fuels and is expected to be a gamer changer in climate change. What does this mean for investments? ‘We believe the sectors best positioned to capture opportunities in hydrogen include renewable energy, integrated oil and gas, shipyards, and diversified equipment suppliers,’ said Peter Gastreich, head of Asia oil and petrochemical research at UBS Global Research. To put the potential into an Asia Pacific perspective, Gastreich believes hydrogen could play a much larger role in the region’s energy mix than the 12% occupied by natural gas today. He said countries like Japan and Korea will rely on imports and this might lead to global supply chain initiatives. Australia and New Zealand could build surplus production and emerge as regional exporters. Meanwhile, China could be at the forefront to develop green hydrogen supply before other countries in the region to eventually build a 100% self-sufficient hydrogen economy. In August, the country approved a huge power project in Inner Mongolia that will use wind to produce green hydrogen. ‘We believe China will scale up its green hydrogen capacity in advance of the region primarily due to the fact that the energy sector state-owned enterprises will build up the integrated supply chains,’ Gastreich, said, adding that this doesn't mean China will lead breakthroughs in terms of costs. These companies have large balance sheets and cashflows, so they can take on lower or no returns in the early stages of developing hydrogen supply chains to secure long-term market share. The chart below maps UBS's view of the hydrogen value chain.
Chart
Launch pads around the world Elsewhere, there are probably close to 30 green hydrogen projects in the pipeline across the Middle East, Europe, Australia, China and Brazil, Gastreich estimates. For example, SGH2 is building a green hydrogen production plant in Lancaster, California, Air Products & Chemicals is developing a plant in Saudi Arabia, and Enegix Energy has confirmed plans to build one in Brazil. ‘Green hydrogen fuel has the potential to decarbonise several industrial sectors and with the greatest potential being for heavy trucks and busses, chemicals, steel, power generation, and city gas,’ Gastreich said. ‘The production of green hydrogen is via electrolysers, which use electricity to break water into hydrogen and oxygen. The eletrolyzers are in turn powered by renewable energy. ‘Hydrogen can then be transported via pipeline, compressed form, or in a medium like ammonia. Once combusted, for example in a fuel cell, the by-products are water and heat,’ he added.
Sources: Morningstar Direct
Peter Gastreich, head of Asia oil and petrochemical research, UBS Global Research
chart
by JILL WONG, SENIOR REPORTER
As bond yields continue to fall, the 60:40 portfolio model looks increasingly outmoded but some tactical fine-tuning could bring it up to date Balancing risk and returns used to be a relatively simple task in the heydays of the 60:40 model portfolio. Whether this was 60% invested in stocks and 40% in bonds or the other way round, the traditional multi-asset mix was uncomplicated and almost fool-proof. The ease with which these balanced portfolios, comprising diversified global equities and core fixed income, outperformed stand-alone asset classes was evident. The model had everything going for it: robust stocks buoyed by sound economic growth, solid bond returns thanks to falling interest rates, and the negative correlation between bonds and stocks counterbalancing the volatility in equity markets. However, falling interest rates led to a decline in bond returns. During 1990-1999, the average rolling 10-year return on a static 60:40 portfolio was 11.5%. This fell to 7% during 2000-2009 and 6% during 2010-2019, continuing the downtrend into the current decade. Post-pandemic, there are large government debt burdens weighing down on global economic growth and interest rates are predicted to stay low for longer. Ten-year US Treasury yields that stood at 4.7% in 2006 and 2.4% in 2016, have fallen to 1.37% in July 2021. ‘The concern is more on low yields rather than increasing correlation between stocks and bonds. In many cases, correlations are still low enough to offer diversification,’ said Mary Nicola, portfolio manager, global multi-asset, PineBridge Investments. Falling returns Returns on a 60:40 portfolio are expected to drop to around 5% over the next 10 years due to lower bond returns. This is a non-starter for pension funds that target 7% annual returns. ‘This is problematic. After adjusting for inflation, real returns are going to be very limited; maybe 2-4% returns above inflation rate. This is not sufficient to support the needs of investors who are living longer and need more for their retirement,’ said Vincent Chan, head of multi-asset, Fullerton Fund Management. Based on Franklin Templeton’s capital market expectations model, the 10-year annualised projected return for a 60% MSCI ACWI / 40% Bloomberg Barclays Global Aggregate reference portfolio is only 3.8%. Subash Pillai, head of client investment solutions Apac, Franklin Templeton, noted that this is a significant drop from historical levels. ‘That’s where investors need to ask themselves if this return is likely to be sufficient to meet their needs. If it is not, then where and how do they need to take additional risk?,’ he said. Breakdown in correlation Is 60:40 still a viable proposition given that markets are expecting equities to outperform fixed income as the world recovers from Covid? There is less of a case for it from a risk-reducing perspective; the negative correlation between stocks and bonds no longer works as well. Typically, in past downturns when inflation was tame, central banks were able to use their monetary policy leverage to offset economic weakness. In those times, markets would expect central banks to reduce interest rates and bonds to rally. That inverse relationship may be failing as the markets have factored in a reliance on fiscal policy post-Covid. This means even if the US government issues more bonds, interest rates are expected to remain low and therefore, bond prices are unlikely to rise as much. ‘You should expect a lower sharpe ratio benefit from diversification,’ Pillai said. Pillai warned that a phenomenon of positive correlation between stocks and bonds, as seen during the 1970s through to mid-1990s due to oil price spikes and wars, could resurface and give the 60:40 a run for its money. However, given the inherently volatile nature of equities, there is unanimous agreement among fund managers that bonds still have a place in the post-Covid world. ‘Bonds still have a very important risk-mitigating quality relative to equities,’ said James Ashley, head of international market strategy, Goldman Sachs Asset Management. ‘Perhaps this is not as strong as before, given we are talking about the environment of much lower rates and the extent of negative correlation to equities and the buffer you get during stress events is perhaps lower, but they are still very important,’ he said. Get creative Investors don’t have to give up the safety net of fixed income by swapping bonds for equities because the 60:40 model can be fine-tuned to deliver higher returns while keeping risk to reasonable levels. Within fixed income, there are opportunities in sectors such as emerging market debt and hybrids, said Shoqat Bunglawala, head of multi-asset solutions for EMEA and Asia Pacific at Goldman Sachs Asset Management. ‘Previously you might have had meaningful allocations to US high yield; you might want to reallocate some of that to Asia,’ he said. Citywire tracks 245 Asian bond funds including 98 funds within the Asia Pacific hard currency bonds sector that delivered 17.7% in average total returns in the three years to 30 June 2021. Citywire’s US dollar high yield bonds sector delivered 18.7% during the period. Another way to manage the portfolio would be to adopt an active management approach that allows the fund manager to tactically switch between equities and bonds. ‘We are in a very interesting period where both equities and bonds are expensive at the same time. It means we need to be tactical to avoid the asset class that may become overvalued and suffer a major correction,’ Chan said. Besides taking a tactical approach, another option would be to add alternative asset classes into the portfolio, such as property and private equity. Historically, private equity has generated returns 300-400 basis points higher than the S&P 500. Chan said that going into illiquids is an attractive proposition but investors are unable to access their funds when they need to. ‘That is a trade-off that investors need to bear in mind,’ Chan said. Another asset class to hold in an environment of low interest rates and the overhang of event risk in the background is gold. ‘Gold is potentially interesting this time round because interest rates are so low, and secondly the tension between the US and China has gone up. So these two scenarios are very important because it may create an event risk in which your financial assets would do very poorly,’ Chan said.
Fixed Income
fixed income
Singapore’s luxury property is now on the shopping lists of a new generation of high net worth individuals who can afford to spend millions on a roof Private wealth accumulation in Singapore has led to a booming luxury property sector despite the pandemic, and pent-up demand from foreign buyers means the market is set for an extended rally. ‘Overall, the luxury property sector in Singapore has made a relatively strong comeback as sentiment improved on the recovery of the economy and steady vaccine programme rollout,’ said Ismail Gafoor, CEO of real estate agency PropNex. Good-class bungalows are coveted for the prestige that freehold land ownership confers, said Mark Wang, a property agent with PropNex who focuses on high-net-worth clients. ‘For ultra-rich Singaporeans, if they can afford it, they will definitely go for the good-class bungalows. It’s more of a status thing for the rich. It’s a must-have for people who are at the pinnacle,’ Wang said. A bungalow under construction on Cluny Hill near the Singapore Botanic Gardens was recently offered for sale at SGD $63.7m ($46.8m), equivalent to a record SGD $4,291 ($3,155) per square foot (psf) for the 14,843 square feet piece of land. This broke the record of SGD $4,005 ($2,945) psf set earlier this year for a bungalow in Nassim Road on a 32,159 square feet plot. The option to purchase the Cluny Hill property is believed to have been granted to a local technology entrepreneur in his 30s who recently sold his start-up. ‘Good-class Bungalows have been attracting more and more wealthy investors since the start of this year, with some properties being purchased for record breaking prices,’ Gafoor said. Leonard Tay, head of research at Knight Frank Singapore, agreed good-class bungalows are a trophy for the ultra wealthy. ‘The limited availability of these homes and other types of landed housing within the central districts, and the restrictive nature of landed properties for foreigners, will compel more interest from the growing number of ultra-high-net-worth Singaporeans and newly-minted citizens,’ he said. In 2019, billionaire James Dyson, who is a Singapore permanent resident, bought the island’s most expensive penthouse in Guoco Tower for SGD $54m ($38m) with cash. In the same year, he also bought a bungalow in Bukit Timah for SGD $45m ($33m). A year later, Dyson sold the penthouse for SGD $47m ($35m) to Indonesian billionaire Leo Koguan. Local demand Wealthy Singaporeans falling into the highest income brackets are growing in numbers. The proportion of those earning at least SGD $20,000 ($14,745) per month doubled to 13.9% in 2020 from 6.6% 10 years ago, according to the Census of Population 2020. Demand from rich Singaporeans, which make up three quarters of home purchases in the prestigious core central region (CCR) comprising districts of 9, 10, 11 and Sentosa, were the reason new luxury property prices stood firm during the pandemic. This was evidenced by the launch of 15 Holland Hill at the height of the pandemic in April 2020. Its 57 units came at an average price tag of SGD $8.2m ($6m) each, or SGD $2,979 ($2,190) psf. Ten units have been sold since launch. In August 2020, Dalvey Haus was launched at an average price tag of SGD $11.2m ($8.2m) for its 17 units, of which four have been sold since launch. ‘Many homeowners took the chance to leverage on the robust private property market as well as the current economic conditions to sell off their existing houses at higher prices and purchase larger homes by taking advantage of the low interest rate environment,’ said Tay. Tay said work-from-home preferences also encouraged local homeowners to look for larger homes. ‘The growth of private wealth in Singapore is set to continue and even strengthen, due to the positive economic recovery,’ he added. In the CCR, sales of new private condominiums rebounded to 803 and 671 units, respectively, in the first and second quarters of 2021. During the circuit breaker at the height of the pandemic, sales dropped to 175 units in Q2 2020 from 525 units in Q1 2020. The average unit price of these flats dipped to SGD $2,448 ($1,800) psf during the circuit breaker in Q2 2020 but has since picked up to $2,660 ($1,956) psf in Q2 2021. Luxury property prices are expected to continue rising. ‘Developers have thus been rather bullish in recent government land sale tender bids to replenish their land bank. The top bids scaled new heights as developers remained confident of sustainable homebuyer demand into 2022,’ Tay said. Pent-up foreign demand Foreign buyers are gradually returning to the city-state as travel restrictions are eased. In districts 9 and 10, foreigners accounted for an estimated 33% of total private residences sold in the first half of 2021. ‘Singapore’s reputation as a stable and safe-haven investment destination puts it on the radar of global investors including-high-net-worth individuals, said Gafoor. Penthouses larger than 3,000 square feet in newly-launched projects such as Park Nova and Midtown Modern have been snapped up by foreign buyers, estate agents say. Les Maison Nassim, launched in May 2021, has sold one unit out of 14 at a price tag of SGD $39m ($29m). Park Nova, also launched in May 2021, has sold 14 units out of 54 for SGD $15.2m ($11.2m) on average for each flat. According to PropNex data, buyers from China made up 24.3% of CCR home buyers in the first half of 2021, followed by Indonesia with 19.9%, Malaysia with 9.6%, the US with 8.8% and India with 8.4%. ‘Generally, we notice that Chinese buyers tend to prefer prime, high-end projects in the city, such as in River Valley, Orchard Road, and the Bugis area. A sizable portion of our Chinese clients opted for larger units of four-room and above,’ Gafoor said. Singapore’s stable political environment, steady currency and transparent regulatory framework are a draw to foreign buyers because they see the city-state as a safe place to park their funds, Gafoor said, adding that he expects the overall CCR new home sales market to do well this year with a couple more luxury launches in the pipeline, including Klimt Cairnhill and Perfect Ten. Knight Frank’s Tay added that ultra-wealthy foreign buyers favour acquiring trophy assets such as luxury penthouses which are not subject to the buying restrictions imposed on landed properties in Singapore. ‘The exclusivity of unblocked views in high-rise Singapore and the spaciousness of penthouses still holds its allure for foreign buyers,’ he said.
pROPERTY
Property
by Vinicius Ciano, research analyst
Based in Hong Kong, Jack Lee has received another rating this month. He has been consistently rated since he first became eligible in November 2016, which adds up to an impressive 57 consecutive ratings. He joined Schroders from Huatai-Pinebridge Fund Management in 2012. Shortly after joining the firm, he was handed the Schroder China Equity Alpha fund to manage alongside Louisa Lo. Some years later, he began running the Schroder ISF China A fund. Both strategies are currently listed in our Chinese equity sector and contributed to his current AA rating. The Schroder China Equity Alpha fund has its largest sector position in information technology, which accounts for 20.3% of the portfolio and is 3.6% higher than the comparative index. The fund’s largest single holding is financial services company Ping An Insurance, which makes up 5% of the portfolio.
Ones to Watch
This month, Chris Chan has received his second consecutive AAA rating. Chan manages funds across three different sectors but the main contributor to his current rating is the New Capital Asia Future Leaders fund, listed in the Equity - Asia Pacific Excluding Japan sector. During the past three years, Chan has returned 85.1% while the average manager returned 38.4% in USD terms. This performance gives him a solid 4th position in the peer group ranking with a total of 234 managers. The New Capital Asia Future Leaders fund is a high conviction, highly concentrated portfolio that invests in growth companies with good management through a bottom-up and fundamental investment approach. Chan has found opportunities in the Industrials sector, which accounts for 10.7% of the fund and is one of his largest overweight positions compared with the benchmark. Among the highest company bets is Taiwan Semiconductor Manufacturing Company, which makes up 8.5% of the strategy and is 1.5% overweight against the MSCI AC Asia ex Japan index.
Chris Chan
Jack Lee
Leon Eidelman received his 26th consecutive rating this month and has held an AAA rating for the past four months. He is currently active in the Global Emerging Market sector where he manages five funds. Among his successful strategies is the JPM Emerging Markets Equity fund, which is available for sale in 26 countries, including Hong Kong and Singapore. He started managing the fund in 2013, alongside Austin Forey. The information technology sector makes up 23.3% of this fund’s portfolio and represents an overweight position versus the 20.5% in the MSCI EM index. In terms of geography, the fund has a high conviction in the Chinese market, which accounts for 49.5% of the fund versus the benchmark’s 37.6%. The managers are looking for further opportunities in these areas using a fundamental, bottom-up stock selection process.
Leon Eidelman
When people ask M&G Investments’ Greg Smith the question ‘Why should I invest in emerging market bonds?’ he replies with another question. ‘Why wouldn’t you?’ ‘Why you would ignore 90 countries in the emerging market space. That’s about 85 percent of the global population providing a lot of opportunity,’ says Smith, an emerging markets strategist at the group. ‘It’s a vast universe of investable assets, including sovereign and corporate bonds from different countries in both hard currency and local currency.’ Of course, just because so many people live there doesn’t guarantee investment success. But it’s the economic outlook for the emerging markets that Smith believes cements his case for investing there. ‘Some EM economies are growing at about 7 percent per year – that’s an exciting growth rate, where the size of the economy doubles in around a decade,’ he says. On top of that, many EM countries have done better than their developed counterparts in coping with the coronavirus pandemic. ‘It has been a tough year with the pandemic, and the outlook is uncertain,’ he says. But as he points out, the IMF has forecast that emerging markets and developing economies will have suffered less of an impact in 2020, and he also sees the potential for a faster recovery. ‘There are pockets of resilience, including in Asia, where economies are doing well and also set to rebound faster in 2021,’ he adds. Time trials Smith’s colleague, M&G’s head of emerging markets debt Claudia Calich, shares his enthusiasm and suggests a long-term approach is likely to reward investors, as it has in the recent past. ‘If you look historically at the asset class over the last two decades, it has produced solid returns, usually high single-digits on an annualised basis,’ she says. For Calich, “the long term” is the key phrase here. Trying to jump in and out by timing the market is far less rewarding and often damaging to a portfolio. ‘If you try to pick short term, you risk either buying at the top or selling at the bottom,’ she says. She points to the example from earlier this year when the market panic over the emerging Covid-19 pandemic led to a massive sell off, not only in emerging market debt but in every risk asset class. ‘If you were trying to trade in the short term and you didn’t exit within a couple of days, it was way too late. ‘Basically, just like in 2008 with the collapse of Lehman Brothers, you would have been better off doing nothing,’ she says. ‘The message is to stay away from the extreme volatility and just ride the long-term trends.’ Neither Smith nor Calich deny that EM bond investors need to have an even temperament to cope with volatility in the asset class. But they argue that sometimes the lurid headlines about a country default can unjustly deter investors. ‘There’s a diverse set there. In some areas, the risks are extreme, and there are some countries in default or who are likely to default over the next year,’ Smith says. ‘For most countries, that just isn’t the case, and the fundamentals for many issuing nations are strong.’ For many investors, perceptions remain clouded by emerging market crises of 20 years ago and longer.
Drawing on lessons from the 2008 recession and national responses to the climate crisis, M&G Investment advisers see potential in emerging market debt.
words by Patricia Holburn
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Emerging market bonds look to outlast volatility
Emerging markets have worked hard over the last 20 years to be more resilient
‘To insulate themselves from these extreme ups and downs, emerging markets have worked hard over the last 20 years to be more resilient. They have taken steps, including borrowing more in local currency than hard currency and building up liquid buffers in foreign exchange reserves,’ Smith says. ‘These steps, particularly in the case of the Asian economies since the late 1990s crisis, have been important for restoring and insulating emerging markets from some of this volatility. This is a real example of a change for the better.’ In essence, argues Calich, successful investing in EM bonds requires the same discipline that fixed income investors should apply anywhere: accept that things can and will go wrong with the countries and companies you are lending money to, and plan accordingly.
She says investors have to recognise that even if they do avoid the big blow-ups, there is still a good chance that they are going to get caught in some unforeseen situations. ‘Investors aren’t perfect. If you get defaults in your portfolio, the next best thing is to size the positions properly. In other words, don’t have a massively concentrated portfolio. Think always about what can go wrong, as opposed to what can go right in the portfolio,’ she argues. But that doesn’t mean being too safe to the point of avoiding reward. ‘You do have to take some risk. So, employing a thorough fundamental approach and making sure to monitor the credits and the assets you’re investing in are important. At the end of the day, if you’re too defensive, that’s not going to work well in a rallying market. I think it’s a combination of carrying on and learning from your mistakes.’ Growing green Calich and Smith both see exciting developments in the EM bond markets over the next five years, particularly with the growing importance of environmental, social and governance (ESG) factors. More emerging countries are setting objectives for both climate and social objectives that need to be financed. Issues are already coming to market aimed at fulfilling the UN’s Sustainable Development Goals, which provide a target for the growing pool of money looking for ESG impacts as well as financial returns. Given its geography, Smith believes that China could be pivotal in the growth of EM bond markets. ‘It’s obviously already one of the world’s biggest economies. The question now is how quickly China is going to grow. Will the economy double over the next decade? Domestic investment trends, government regulations and the state of geopolitics will create a fascinating set of events over the next five years, I expect,’ he says. Looking elsewhere in the world, Smith also sees potential growth from countries located in the Gulf region, which has been joining the main EM bond market indices over the last few years. ‘Many of those countries have struggled with lower oil prices, but they’ve decided to come to the markets instead of using their large stocks of financial assets,’ he says. ‘We see more issuance from those issuers and hopefully some more green efforts as they need to finance solar power plans to develop the non-oil economy.’
The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. Wherever past performance is shown, please note this not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.
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Claudia Calich, Head of Emerging Markets Debt
Gregory Smith, Emerging Markets Strategist
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