Magazine issues » December 2020

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

Funds Global Asia – Are you seeing an increased focus on sustainability in alternative asset classes as a result of Covid-19? Ban – We are seeing more conversations. Alternatives as a diversifier is very real, we are seeing increased client activity and searches in the field because fixed income isn’t providing its usual role in terms of diversification that clients may have expected, hence the interest in alternatives. Armin Choksey, PwC Singapore – We have certainly become very busy with the alternatives, more so on the private credit side and within private credit, direct lending in particular, which has spiked significantly in 2020. On the other hand, closed-ended asset classes like health, private equity funds focusing on healthcare and pharmaceuticals have picked up again. Venture capitalists are also focusing on health debt. Among the fund launches that we are seeing, we are seeing a lot more venture capital (VC) fund launches. In terms of sustainability, we are seeing more talk than action. There is intention, the morale has shifted, people want to do it, but quite a lot of them don’t know how to and don’t distinguish one from another. We heard this topic on lack of standardisation taxonomy again and again, but actually there has been a lot of movement in that field. We will hear the success around that in the first quarter of 2021 – quite a few standard boards have announced plans that they have moved things along, so that will give a good push and impetus to the market, because that is the clarity that the market has been waiting for. I see more jobs out there for impact and ESG analysts now than I would see for equity or a fixed income analyst, so that shows that there is positive intent behind these talks. As far as fund launches, I don’t see too many of them today, but it is brewing. Funds Global Asia – What do you consider to be the top three risks in the current environment? Choksey – On the non-investment side for the asset management business, we do certainly see operation risk as the biggest one, primarily because working from home has brought up a very important topic in the minds of chief operating officers (COOs) about the resilience of their infrastructure and the dependencies on the service providers and the information flow that goes back and forth. We have gotten quite busy with managers in helping them re-look at their operating model. It is also timely for them to look at digitisation of their operations and at new ways to bring money into the firm; digital banks or digital channels have also become quite an interesting topic to speak with clients. There is still some room to grow on the digital side because we don’t know yet who is getting the digital banking licence, and also the empowerment for the Payment Services Act last year has gotten a lot of e-wallets out and started launching investing platforms or tie-ups with various fund managers. That is completely changing, the distribution market is devolving because of this, again it is the regulator who plays a big part in shaping any financial services industry, so they have been instrumental in bringing about this change. Time will tell whether it was successful or not. Goh – Clearly there’s hope with the vaccines – the regulatory approval has created hope, but the unintended side effects of sorts are unclear. There are also potential production hiccup risks, but it is not a central case. There is also a risk around unexpected rising inflation expectations. The world has decided and looked through the current lockdowns and the increase of Covid cases around the world towards a brighter, better 2021, but they’re not really pricing in a substantial pick-up in inflation and the risks of central banks’ retrenching of liquidity from the system. Again, this is not a central case, but it’s going to be a meaningful risk if that does pan out, for whatever reason, it could be a supply-side shock, or it could be demand-side overheating that comes ahead of expectations. This would cause quite a substantial upheaval in the markets, denting financial markets sentiment substantially in a highly indebted world should central banks start posturing for withdrawal of liquidity support. In terms of the tension between the US and China, regardless of whether it’s Biden, Trump or whoever is in the White House, it’s not going to change the picture. It will persist, but perhaps in a much more managed form under Biden’s leadership. If anything, China has more to fear of Biden than Trump because he has, through his years of political career, built up substantial relationships with the EU political circle and with other leaderships around the world. It’s not inconceivable for him to lobby for their support to actually push China a little bit more in terms of opening up of key sectors to the West, and tighten its regulations around intellectual property, for instance. These three risks are not totally priced in. Ban – I agree with Irene on the risks. Most people would still put Covid-19 and the policy response for a potential virus resurgence as one of the top risks. Obviously, there are expectations baked in, as we can see from the performance of equity markets recently due to the optimism around potential vaccines, so anything that derails that implementation and rollout will be a risk to markets. In terms of the US and China, the rhetoric may be toned down, but the intentions may remain, and that’s something to watch. Linking to Armin’s points on ESG and social issues with regard to fiscal policy, there will be a need for fiscal discipline at some point, in terms of governments’ handling of the pandemic. At some point, there cannot be infinite amounts of fiscal stimulus and support, and we should watch what happens with regards to government change and discontent from the public over policy. We all know that wealth inequality is high and rising, which is why ESG and social issues have come to the fore significantly during the pandemic, because the wealth inequality and the social issues that divide us are very stark. That could lead to political change and regime shifts, and it’s something which we should continue to watch out for. Coxeter – In terms of key risks, firstly, as a backdrop we think it’s crucial to have humility and the intellectual honesty to acknowledge that we don’t know the future, particularly as we’re entering terra incognita in some aspects of monetary and fiscal policy, for example. So, perhaps the biggest risk is the unknown unknown, and although we’ll make well-reasoned estimates that shape our investment decisions, portfolio diversification is really a manifestation of that intellectual honesty in recognising that we may be wrong about the future. To highlight a few risks, clearly we’ve seen stimulus packages around the world, but one obvious risk is premature tightening of monetary and/or fiscal policy, which could reduce demand and impact sentiment and financial conditions – particularly as the markets expect accommodative policy for a long time to come. But overall, we think this risk is unlikely to occur. As Irene mentioned, with the policy backdrop, higher debt levels, money creation, another risk is unexpected inflation, and frankly, we’ve all become accustomed to disinflationary pressures. This is an unlikely risk over the shorter-term given spare capacity in major economies, but it is a plausible medium-term risk and policymakers may well find inflation desirable as a way to alleviate debt burdens. We’re not so worried about there being 1970s-level inflation, but just think that even mid to high single-digit inflation would be very significant for portfolios in a heavily indebted world with asset markets priced for very low inflation, and also portfolios not necessarily that well put together for an inflationary environment. The last risk we flag is climate transition risk. 2020 has been a real shot in the arm towards a sustainable future, with Covid-19 intensifying interest in other potential future system shocks and risks like climate change, water scarcity and social risks. Climate change presents both near-term policy risks but also longer-term physical risks, and it’s really important to develop a total portfolio climate transition plan. There is a growing recognition across clients that responsible investing helps position them for a wider range of future risks.

Industry comments

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Ross Dilkes, fixed income portfolio manager at Wellington Management, examines the opportunities and risks for bond investors presented by the region’s decarbonisation agenda.

A quiet revolution in Japan’s corporate governance

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