Discover
Markets have become more upbeat but investment heads of private banks still have a lot of work to do, as interest rates remain low and inflation fears are looming on the horizon. In this quarterly publication we showcase the top 30 chief investment officers, who not only talk about their climate solutions and how they are positioning portfolios for potential inflationary pressure, but also showcase their strongest alternative bets and where they are likely to take their emerging market allocations next. We also bring to you the latest investment heatmap, where leading asset allocators reveal their major calls across equity, fixed income and alternatives at the start of Q2 and where their contrarian thinking currently lies. We hope this publication gives you an insight into how top investment decision makers think and where they are likely to move next.
Margaryta Kirakosian Deputy Editor, Citywire Selector
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Inflation positioning
Climate solutions
EM horizons
alternatives
inflation position
Alan Mudie
Chris-Oliver Schickentanz
Edmund Shing
Jeffrey Sacks
How are you positioning your portfolios for the uptick in inflation and interest rates? What does it mean for your allocations? We cut our government bond allocations to a strong underweight in early November 2020 with a focus on short durations. This enabled us to protect portfolios from the sharp rises in inflation expectations and long rates, although we did not expect the upswing in Treasury and gilt yields to be quite so dramatic. At the same time, we kept a neutral weight in break-evens, a proxy for market expectations for the trend in inflation. We also scaled back allocations to investment grade corporate bonds to underweight at the start of this year. We judged that investment grade spreads offered little further room to tighten, leaving corporate bonds vulnerable to downside in sovereign bond prices. Within equity markets, in late November we rotated positions towards those markets which are most sensitive to a cyclical pick-up in activity, by upgrading the eurozone and Japan to overweight while keeping the US at neutral. Mega-cap technology and internet retail stocks dominate the US sector breakdown and we felt that these sectors were vulnerable to a rise in sovereign yields – discounting long-duration growth in cashflows at higher rates has a negative impact on net present values. Within the US, we recommended upgrading cyclical sectors such as industrials and materials. Finally, in an environment of rising rates, value stocks tend to outperform growth. Our current recommendation is to equal-weight value and growth in portfolios.
Location: Geneva
Firm: Société Générale Private Banking
Job: Global head of investment strategy and CIO
How are you positioning your portfolios for the uptick in inflation and interest rates? What does it mean for your allocations? Overall we have a clear focus on real assets like equities, commodities and renewables. We believe that inflation and rising interest rates are not a game changer on the equity side. The market will still play an economic recovery and a potential end to the pandemic. For fixed income it is too early to step in as we would expect rates to rise further until summer.
Location: Frankfurt
Firm: Commerzbank
Job: CIO
How are you positioning your portfolios for the uptick in inflation and interest rates? What does it mean for your allocations? We are underweight cash in USD and euros and favour commodity currencies such as the Canadian dollar and Swedish krona. We are also underweight bonds. In sovereigns, we remain short duration and long inflation-protected bonds, especially in the US and UK. In credit, we prefer fallen angels within US high yield credit, and also European high yield. We also like USD-denominated emerging market sovereign debt, particularly that issued by commodity producing countries. We have a big overweight in commodities with a large position in both industrial metals exposure (copper, tin, aluminium) and precious metals with industrial demand (silver, platinum, palladium, rhodium) via commodities funds. We avoid foodstuffs as BNP does not invest in agricultural futures for ethical reasons. Elsewhere, we are overweight equities with a heavy cyclical value and mid/small-cap bias, preferring the eurozone, UK and Japan. From a sector perspective we are positive on mining, building and construction, industrial capex-related companies, banks and insurance, and semiconductors. Themes we favour include beneficiaries of pent-up consumption, companies that are geared to the future of food, healthcare diagnostics and medical devices geared to longevity. We also have an overweight to alternatives. In real estate, we have exposure to central city office locations with good transport links, logistics (warehouses) and German residential Reits. In hedge funds, we have a focus on absolute return bond funds, merger and risk arbitrage hedge funds and distressed debt. In addition we like private infrastructure funds.
Location: Paris
Firm: BNP Paribas Wealth Management
How are you positioning your portfolios for the uptick in inflation and interest rates? What does it mean for your allocations? We are significantly underweight fixed income. Valuations are stretched, particularly in sovereign bonds. As inflation expectations are likely to rise further during the second quarter, due to year-on-year base effects, pent-up demand, and a pick-up in services as mobility increases, we expect further bond price weakness. We are significantly overweight in equities. The rising price pressures are evidence of the firming up of the new economic cycle. This is likely to lead to a strong year for corporate earnings growth. In addition, short rates are remaining low which is supportive for equity valuations. As long rates rise, steepening yield curves, value stocks should begin to outperform versus growth stocks.
Location: London
Firm: Citi
Job: Head of investment strategy for EMEA
How are you positioning your portfolios for the uptick in inflation and interest rates? What does it mean for your allocations? We believe our current asset allocation is also coherent in a scenario of mildly higher inflation. In fact this stance may also prove helpful in dealing with rising inflation. Looking at our approach in more detail, we are overweighting a growth and commodity play such as emerging market equities, and a cyclical/value play such as European equities. We are also maintaining an underweight positioning on core government bonds, while reducing their duration, and increasing a selective positioning on inflation-linked bonds.
Manuela D’Onofrio
Location: Milan
Firm: UniCredit
Job: Head of group investments and solutions
How are you positioning your portfolios for the uptick in inflation and interest rates? What does it mean for your allocations? We updated our strategic allocations in January and have moved further away from cash, near-cash and government bonds. On the other side, we significantly increased our exposure to diversified commodities and certain segments of the hedge fund universe. These moves, while strategic in nature and therefore having very little to do with the incoming macroeconomic backdrop, have already served us well since implementation. There is of course no one investment that does well at any level of inflation. As always, much depends on the difference between what is already expected by investors (and therefore incorporated into asset prices) and the actual outcome. We can’t know either of these from our current vantage point, even if we can make educated guesses at both. History suggests that as you move up through inflation bands, you find that real assets such as commodities start to outperform more traditional financial assets. However, the often reluctantly muttered warning about past performance containing less information than we might hope for is appropriate here. Right now the same forces driving bond yields and expected inflation higher are also likely to burnish the prospects for corporate profits growth. The main message should be one of humility – for our part, this humility is embedded in the time the team devotes to mathematically imagining hundreds of thousands of viable future paths ahead, some with problematic inflation, some without. The trick is to find the mix of assets that sits mostly robustly among all of them rather than placing a macho bet on a singular, usually extrapolative, vision of what is to come.
Will Hobbs
Firm: Barclays Investment Solutions
How are you positioning your portfolios for the uptick in inflation and interest rates? What does it mean for your allocations? In the second half of the year, the US economy is set to grow at rates last seen in the late 1970s and early 1980s. Accordingly, the US bond market is building up a risk premium against inflation and earlier-than-expected policy tightening. However, we are not yet in a macroeconomic regime of monetary and fiscal fusion. Public statements from current officials show that they still consider tolerance of the public deficit as an emergency measure justifiable only by exceptional conditions, such as the current pandemic. Reflation is thus on the horizon, but we are not there yet and the journey will be bumpy. In the second quarter of 2021, if history is any indication, we expect the rise in Treasury yields and associated style rotation to at least pause. The question is therefore how to steer the equity allocation, to focus on value and cyclicals, or rather growth? Our answer is to combine both, especially in this decade that will ultimately be marked by a sustained reflation of the US economy. We favour a style-neutral strategy combining innovative growth companies and beneficiaries of economic normalisation. On the fixed income side, we are slightly short duration, with a small defensive position in US Treasuries. We remain constructive on quality credit and favour CNY-denominated Chinese government bonds.
Yves Bonzon
Location: Zurich
Firm: Julius Baer
What kind of climate solutions are you investing in? Can you name any funds or companies you use to gain exposure to the theme? All our investments have to be in line with our sustainability framework for us to invest. Our fund management is grounded in accordance with our application of the UN Principles for Responsible Investment. Our investment selection is based on comprehensive analysis of all investments and internal funds as well as those from external fund managers, where sustainability is an integral component. For example, we have investments tilted towards renewable energy, clean water and waste management, and poverty and we measure the UN’s Sustainable Development Goals exposure in all our investments. One example of a specific fund we favour in this regard is Handelsbanken Renewable Energy. Although an internal fund, it recently received awards for its sustainability focus. An external example is the Fidelity Sustainable Water & Waste fund with its foundation within the SDG goals that seeks to integrate ESG issues in its investment and risk monitoring process. We have also invested in other external as well as internal funds that contribute to climate solutions and other SDGs.
Johann Guggi
Location: Stockholm
Firm: Handelsbanken
Job: CIO asset allocation
What kind of climate solutions are you investing in? Can you name any funds or companies you use to gain exposure to the theme? We invest in climate solutions from various angles. First, we favour investing in companies that are developing products and services that help mitigate or adapt to the effects of climate change, including in industries like renewable energy, energy efficiency technology and smart materials. Second, we look for companies that are leaders in trying to reduce their own impact on the climate, by reducing the carbon footprint and other negative environmental impacts of their operations, particularly tilting portfolios towards industries and companies with relatively lower carbon footprints. Third, we consider lending to companies or governments that use the proceeds to directly finance activities that address problems caused by climate change. Finally, we look to funds that are using their influence as owners or lenders to lobby for a bigger focus on the first two issues at the companies they invest in. One example is the collaborative engagement initiative Climate Action 100+.
Mark Haefele
Firm: UBS Wealth Management
What kind of climate solutions are you investing in? Can you name any funds or companies you use to gain exposure to the theme? We continue to expand our investment suite to provide a larger and more diversified set of options across the spectrum of sustainable investing. Our investment strategies for managed accounts offer access to a full range of financial instruments, with a mix of mutual funds, ETFs, customised ESG products, private equity and alternative investments that aim to generate attractive returns while integrating ESG criteria and specific impact themes. For wealth management clients, we introduced a new actively-managed discretionary solution in 2020, offering exposure to companies that contribute to efforts to adapt to and/or mitigate climate change. This aims to generate financial returns, while integrating ESG factors into the security selection process and focusing on climate themes that offer strong investment opportunities. The solution covers five themes linked to climate change: water and the ocean; green energy; smart cities; food and agriculture; and health and inclusion. The mandate solution invests in climate leaders and helps support sustainable development and human prosperity. In terms of financial returns, the strategy seeks out opportunities arising from climate change by investing in companies already prepared for it. Next to an active and carefully constructed tactical and strategic asset allocation, the mandate solution aims to add value through its special fund selection process in which each strategy is directly allocated to one of the climate sub-themes. The mandate also provides investors with dedicated climate reporting (i.e. theme allocation, market updates regarding new climate policies and sustainability metrics), access to a dedicated portfolio manager as well as a sustainability expert – all of which provide increased transparency to clients.
Michael Strobaek
Firm: Credit Suisse
Job: Global CIO
What kind of climate solutions are you investing in? Can you name any funds or companies you use to gain exposure to the theme? As a sustainable asset manager we integrate sustainability considerations in all our investment decisions. This includes a thorough assessment of climate risks and also opportunities. This is where climate solutions come into play from an investment point of view. The need for new products and services which enable the green transition is tremendous. Companies which cater for these needs and offer innovative solutions will see their revenues increase dramatically. Within fixed income the best way to benefit from these climate related opportunities is to allocate capital to green bonds. In our sustainable mandates we invest a portion of our fixed income allocation into funds which allocate a relatively high percentage into green bonds. These bonds offer superior risk-adjusted returns and have outperformed comparable standard bonds in the last few years. As a result, credit spreads of green bonds have narrowed leading to a higher valuation on a relative basis. This valuation premium is likely to increase further based on very strong demand and limited supply. On the equity side there are plenty of investment opportunities in climate solutions. In our sustainable mandates we invest, for example, in the JSS Sustainable Equity - Green Planet fund, which targets the green winners, i.e. companies which benefit from the growth in environmental themes such as future energies, resource efficiency, ecosystem protection and smart mobility. A company example in the fund is Aker Carbon Capture, a pure-play carbon capture technology provider, or Ansys, a pure-player in 3D simulation software which delivers solutions to improve resource efficiency in many industries.
Philipp Baertschi
Firm: J.Safra Sarasin
What kind of climate solutions are you investing in? Can you name any funds or companies you use to gain exposure to the theme? ESG and sustainability, with a particular focus on climate, is an integral part of our investment process. We believe ESG is in a super-cycle and that it is crucial for all investors to be appropriately positioned and aware of the climate risk and opportunities in their portfolios. Sustainability is embedded in our investment committee charter and all major investment decisions are evaluated based on various metrics of sustainability prior to implementation. These include the UN’s Sustainable Development Goals (SDGs) and carbon emission metrics. In our asset allocation framework, we have started evaluating expected risk and return assumptions in terms of their climate impact which feeds into the portfolio construction. On the implementation side, our investment mandates are tilted towards socially responsible and climate-aware companies. Our internal quant-equity mandates combine classic equity factors with ESG factors in our scoring models. We have a large allocation to our equity flagship DI Global Sustainable Future fund, which has the UN’s SDGs embedded in the investment process and aims to benefit from positioning towards social and environmental transition.
Søren Funch Adamsen
Location: Copenhagen
Firm: Danske Bank
Job: Head of portfolio construction
What kind of climate solutions are you investing in? Can you name any funds or companies you use to gain exposure to the theme? As a private bank, we accompany our clients in the transformation of our economic model in favour of one that is sustainable and inclusive. Achieving a net zero economy is a key part of this transition, as each sector and industry evolves. We are in the midst of what the economist Joseph Schumpeter called ‘creative destruction’ to describe new firms emerging and others fading. This shift is creating big challenges while generating significant new investment opportunities. We believe investors need to encourage and embrace this transition to a climate-resilient economy, and we strive to provide our clients with the best offering possible. We are allocating considerable resources to participate in the development, standardisation and harmonisation of sustainable investing. We see this as a phenomenal investment opportunity and believe sustainable investing is a future source of performance for our clients’ portfolios. We think that solutions will come from companies that are actively making the transition to alternative energy, and so making substantial contributions to decarbonisation. Both forerunners and transformers can therefore represent investment opportunities in the global shift to a new economic model centred around clean energy. For our private clients who wish to have their wealth invested with positive climate impact, we can build personalised portfolios. These can be created in a number of ways to suit investors’ preferences, by investing in stocks of individual companies or using fund solutions. Of course, we offer our own funds, LOF Climate Transition and LOF Natural Capital, and we also propose a large selection of externally managed strategies and are adding new sustainable investing strategies to our open-architecture PrivilEdge platform.
Stéphane Monier
Firm: Lombard Odier Private Bank
Are you set to increase your allocation to emerging markets and if yes, what kind of financial instruments are you planning to use? Can you name any third-party funds you are using to cover the space? Emerging markets (EMs) are really lagging the US, Japan and even Europe over the last 10 years. As a believer in mean reversion, at some point we will increase our EM allocation to an overweight. We are neutral now, which means that 14% of our equity exposure is allocated to EMs. At the start of the year, EMs took off really well and did way better than developed markets, but all of this year’s outperformance is gone again. So not yet, but perhaps later this year we may see some opportunities. For example, when the expected post-Covid pent-up demand in the US and Europe weakens, expected growth differences may then favour EMs. We will probably use the funds we already have in our portfolios combined with some large-cap individual lines to increase our exposure. The EM funds we currently invest in are the UBS Global Emerging Markets Equity and Robeco Emerging Stars Equities. Both are concentrated strategies, the UBS fund has more of a growth tilt while Robeco has a value bias. Both have an excellent track record and this combination should allow us to participate strongly in the space. On the bond side we have around 12% allocated to EM debt. If spreads become more attractive, we might increase our allocation by 2% to 3%. We use a combination of passive (SPDR) and active funds (Neuberger Berman, BNP Paribas and NNIP) for EM debt.
bob homan
Location: Amsterdam
Firm: ING
Job: Head of investment office
Are you set to increase your allocation to emerging markets and if yes, what kind of financial instruments are you planning to use? Can you name any third-party funds you are using to cover the space? We remain cautious on emerging markets. The rise in US nominal yields and strong US growth prospects have been making emerging market (EM) currencies look less attractive than before from a tactical perspective. Likewise, the rise in US yields has impacted the relative attractiveness of EM government bonds in local currency. Also, rising interest rates have been and might continue to hurt EM equities. Indeed, EM assets tend to correlate negatively with real yields. While EM equities were initially supported by prospects of a massive US fiscal stimulus and positive Covid-19 vaccine news, rising yields dampened risk appetite. However, we do not want to underweight EM equities in our asset allocation as the earnings picture continues to look supportive. We do not expect EM equities to return a negative performance but it is a relative call to developed market equities.
Cesar Perez Ruiz
Firm: Pictet
Are you set to increase your allocation to emerging markets and if yes, what kind of financial instruments are you planning to use? Can you name any third-party funds you are using to cover the space? We are overweight in emerging market (EMs) equities with a focus on Asia and are not planning to increase the overweight. The same holds true for EM bonds as there are still attractive yield levels available in Asia. However, recently we have reduced the overweight position in equities a little, using corrections in global equity markets as entry points to increase our exposure in Europe, especially in cyclical stocks. As a rule, we implement allocations into EM positions in a diversified way using funds or ETFs. Our base investment to cover EMs is the Global Emerging Market Balance Portfolio, a well-diversified in-house solution. For special investment themes or regions which are targeted for portfolios we apply an open architecture approach with both in-house and third-party funds. We have a special research team for pre-selection and due diligence of funds/ETFs. We are using in-house funds/ETFs, when they fit and are competitive, and use third-party funds when they are more attractive and/or offer special know-how or investment themes.
Christian Nolting
Firm: Deutsche Bank
Are you set to increase your allocation to emerging markets and if yes, what kind of financial instruments are you planning to use? Can you name any third-party funds you are using to cover the space? We have a long tradition of investing in emerging markets (EMs) and use multi-asset solutions to construct well-diversified global portfolios and capitalise on return opportunities for our private clients. We have robust and established internal fund management capabilities, both in bonds and equities, with our Fonditalia umbrella funds under our teams based in Dublin. We plan to increase our exposure to EMs, especially in China and Asia, both in bonds and equities because we believe in their long-term drivers of growth, their rising contribution to world GDP and their global diversification properties. We invest directly in securities with our internal managed funds, as we also mix a selection of third-party funds for our private clients’ wealth management solutions. Funds we favour in equities include RWC Global Emerging Markets, JPM Emerging Market Opportunities, Morgan Stanley Emerging Leaders Equity and Fidelity China Consumer. In fixed income we like Pimco Emerging Local Bond, Neuberger Berman EM Debt and Invesco EM Local Debt. On top of this, we also invest in the Eurizon Bond Aggregate RMB fund.
Renato Zaffuto
Firm: Fideuram
Are you set to increase your allocation to emerging markets and if yes, what kind of financial instruments are you planning to use? Can you name any third-party funds you are using to cover the space? We do not plan to increase our allocation to emerging markets (EMs). In fact, we have just reduced our allocation. This is mainly based on higher rates, our expectations for a stronger dollar and the fact that EMs are more exposed to growth stocks. We use a number of different managers in the EM space including M&G, Numeric, Sands and William Blair.
Richard de Groot
Firm: ABN Amro
Job: Global head investment centre
Are you set to increase your allocation to emerging markets and if yes, what kind of financial instruments are you planning to use? Can you name any third-party funds you are using to cover the space? We are planning to increase our exposure to emerging markets, specifically to the Chinese stock market, for three reasons: the strength of its economic recovery after the health crisis; the growing implications of the 14th Five Year Plan in which sustainability plays an important role; and low index representation. The Chinese economy was hit hard by the pandemic, but it was short-lived. In the third quarter of 2020 it had already recovered the levels before the crisis and the country is expected to grow above 8% in 2021 and 5.5% on average in 2022 and 2023. In terms of sustainability, the commitment towards zero net carbon emissions in 2060 is a giant step taken by the government that could imply an important transformation in the energy system through several initiatives. However, there is more to Chinese equities’ attraction than just the performance of the underlying economy. It is also about how Chinese equities are under-represented in world indices relative to the size of their economy. At the end of 2020, China took up barely more than 5% of the MSCI AC World index despite its economy being over 17% of the global total. By contrast, the US enjoys a near-60% weight in the index despite making up just under a quarter of the world economy. The strategies we have available for our clients are aimed at benefiting from those trends and have flexibility to provide exposure to all the different types of listings available for Chinese companies.
Juan de Dios Sánchez-Roselly
Location: Madrid
Firm: Santander Private Banking
Are you set to increase your allocation to emerging markets and if yes, what kind of financial instruments are you planning to use? Can you name any third-party funds you are using to cover the space? We already hold overweights to emerging market (EM) equities and bonds, with a preference for emerging Asia over emerging Europe and Latin America. We think China’s economic growth, earnings and equity markets should be supported by further improvement to the global manufacturing cycle, as well as the pick-up in local consumer spending we are starting to see. We particularly like exposure to stocks related to digital consumption, tech hardware, high-end manufacturing, electric vehicles and materials. As for bonds, we believe the yield pick-up between developed market and Asian bonds of the same rating is still attractive. We also note that for the same rating, the financial ratios of EM bonds are often better than those of developed market bonds. Financing conditions have tightened a little in EMs, but the stabilisation of US Treasury yields we expect to see in late Q2 should ease some of that headwind. The global investor community is still underexposed to EM stocks relative to the weight of EMs in benchmark indices. In turn, that benchmark weight is far below the share of global GDP growth that will come from EMs in the years ahead. It is not surprising therefore that we are seeing a sharp pick-up in client interest in EM stocks and bonds. Some of the funds we use are FSSA China Growth, Wellington Asia Technology, HSBC Hang Seng Tech Ucits ETF and BGF Asian Tiger Bond.
Willem Sells
Firm: HSBC Private Banking
Richard De Groot
Bob Homan
Alternative funds struggled to deliver returns last year. Do you still use strategies in the space and if so, what kind do you use and what you are looking to add? If you don’t, are you exposed to other alternatives instead, be it bitcoin or real assets? We use hedge funds, namely long/short equities, in order to reduce our correlation to global equity markets and generate performance in a more volatile market environment. We use gold as a hedge against higher-than-expected inflation, should the economic rebound be even stronger than we think. In our Swiss-based mandate we invest in Swiss real estate in order to get yields in a negative rate environment for CHF-denominated bonds. We don’t have any bitcoin exposure.
Lars Kalbreier
Locations: Zurich, Geneva
Firm: Edmond de Rothschild
Job: Global head of investments and CIO of wealth management
Alternative funds struggled to deliver returns last year. Do you still use strategies in the space and if so, what kind do you use and what you are looking to add? If you don’t, are you exposed to other alternatives instead, be it bitcoin or real assets? We don’t have any exposure to alternative funds because of the disappointing performance since the global financial crisis and the high cost of these products. We prefer direct investments in companies and ETFs to express our own conviction and to keep the cost of portfolios under control. The current level of rates make it difficult for alternative funds to generate additional alpha either through income generation or capital protection. We have recently added a small allocation to gold as a partial hedge for an unexpected pick-up in inflation and to reduce cash in negative yielding currencies. We have no exposure to other alternatives.
Carlos Mejia
Firm: Rothschild & Co
Alternative funds struggled to deliver returns last year. Do you still use strategies in the space and if so, what kind do you use and what you are looking to add? If you don’t, are you exposed to other alternatives instead, be it bitcoin or real assets? In a market environment in which central banks suppress market volatility and reduce the downside risks of investing, the need for such funds has lessened. We are therefore underweight. We find the underlying technology behind cryptocurrencies interesting, but their inherently volatile nature and short track record keep us from including them into our asset allocation.
Dan Scott
Firm: Vontobel
Alternative funds struggled to deliver returns last year. Do you still use strategies in the space and if so, what kind do you use and what you are looking to add? If you don’t, are you exposed to other alternatives instead, be it bitcoin or real assets? Alternatives are an integral part of our investment process, especially in the current times, when we cannot count on the returns of fixed income. We increasingly use assets such as private fixed income and private equity, together with real estate assets and hedge funds.
Enrique Marazuela
Firm: BBVA
Alternative funds struggled to deliver returns last year. Do you still use strategies in the space and if so, what kind do you use and what you are looking to add? If you don’t, are you exposed to other alternatives instead, be it bitcoin or real assets? We mainly use liquid alternatives in our discretionary allocation mandates. These are dominated by hedge funds and from time to time we complement them with commodities and unhedged fixed income i.e. fixed income and FX combined. We did not have a difficult 2020 even though we felt the pain during Q2 and our alternative sub-portfolio didn’t escape this. We usually have quite a lot of equity exposure and the collapse in yields has transformed our fixed income portfolios towards a higher degree of corporate bonds. For these reasons we have used our alternative portfolio as a risk broadener with quite low market risk. In our advisory service, where we can implement and offer less liquid solutions, we also use private equity, microfinance, forest, infrastructure and private debt. We put in a lot of effort to develop and offer new versions but also new concepts. We do this on a group level so that we have the option to also use these products in life portfolios and institutional asset management. We have been doing this for a long time, both in-house as well as in partnership with external providers.
Fredrik Öberg
Firm: SEB Private Banking
Job: CIO, investment strategy
Alternative funds struggled to deliver returns last year. Do you still use strategies in the space and if so, what kind do you use and what you are looking to add? If you don’t, are you exposed to other alternatives instead, be it bitcoin or real assets? We don’t use bitcoin, real assets or private equity in our mandates. However, considering the negative scenario for bonds, we are using several alternative strategies. We don’t invest in inflation-linked bonds, but do have exposure to short-term high yield bonds, convertible bonds, long/short strategies and Ucits funds which track the alternative fund index. We also invest in precious metals.
Jean-Jacques Friedman
Firm: Natixis Wealth Management
Alternative funds struggled to deliver returns last year. Do you still use strategies in the space and if so, what kind do you use and what you are looking to add? If you don’t, are you exposed to other alternatives instead, be it bitcoin or real assets? Alternative Ucits funds structurally account for around 10% of our discretionary mandates, for which we use a variety of strategies ranging from absolute return equity long/shorts to multi-factor strategies. Our long short strategies in particular have delivered positive results. Outside traditional mandates, we are proposing hedge fund mandates to our clients with a broader variety of strategies including global macro, event driven or credit. Hedge fund mandates offer the possibility to monetise the illiquidity premium which can be found in offshore funds - such as relative value, special situations, and emerging markets - while limiting the overall drawdown through diversification and less correlated strategies. In this market environment with increasing M&A activity, we are raising exposure to more event driven strategies even in our traditional mandates and advisory activities.
Vincent Manuel
Firm: CA Indosuez
Dan scott
inflation positioning climate solutions Em horizons alternatives
How are you positioning your portfolios for the uptick in inflation and interest rates? What does it mean for your allocations? Overall we have a risk-on bias in the portfolios, with an overweight in equity, and a tilt to cyclical exposures. Within our government bond allocation we have exposure to inflation linkers. We prefer equities, based on the recovery later in the year, the continuing accommodative monetary policy and the solid equity risk premium given the negative/low interest rate environment. Also, equities can withstand a further uptick of inflation and higher interest rates. Higher rates in the US are no deal breaker for the bull market in equities if rates rise gradually over the coming quarters. If rates rise too fast and pose a risk for the recovery, central banks are likely to implement further measures. Our allocations as a whole could therefore outperform our benchmarks in a scenario with an uptick in inflation and higher interest rates.
Taoufik Boussebaa
Location: Utrecht
Firm: Rabobank
Job: Head of strategy and communication
Norman Villamin
Are you set to increase your allocation to emerging markets and if yes, what kind of financial instruments are you planning to use? Can you name any third-party funds you are using to cover the space? We are not increasing emerging markets (EMs) for the time being. We are already strongly overweight in emerging bonds and equities, especially in China and Asia. EMs in general have suffered since the start of the year from rising long-term interest rates in the US as well as the USD appreciation. However, despite the headwinds, conditions are otherwise supportive. Synchronised global growth, higher commodity prices and increased global trade should support the asset class in general. In the fixed income space, EM debt yields are historically attractive compared with US high yield. In the equity space, we are constructive in long-term on Chinese equities and A shares in particular. The recent underperformance is mainly due to short-term rotation as well as some regulation risks and policy tightening. The economic cycle is more advanced than the rest of the world. As a result, Chinese equities were hurt by the first-in, first-out effect. However, long-term growth prospects remains intact and valuations have become more attractive after the recent correction. Outside China, idiosyncratic risks are high, and investors must be very selective. Funds we favour on the bonds side include Fidelity Funds – Asian Bond, and on the equities front we like Aberdeen China A Share Equity.
Firm: UBP
Thomas Wille
thomas wille
Firm: LGT Private Banking
Job: Head of research and strategy
How are you positioning your portfolios for the uptick in inflation and interest rates? What does it mean for your allocations? At the beginning of the year we thought we would see upward pressure on inflation expectations and thus on the long end of the yield curve, especially for US government bonds. The main driver for this scenario is better economic growth not only in Asia but also in the US and therefore globally. This was also the main reason why we started to reduce government bonds with an underweight in January and advised our clients to be short in duration on the fixed income side. With the additional US fiscal package of $1.9tn in Q1/2021 and the announced infrastructure package by the Biden administration of around $2.25tn, the pressure at the long end is likely to continue. On the equity side, we continue to pursue a barbell strategy. On the one hand, we remain invested in cyclical sectors such as banks that benefit from a steep yield curve. On the other hand, we are invested in companies that benefit from secular trends such as digitalisation and have the pricing power to pass on a short-term price increase to their customers. As long as the rise in inflation expectations is only in the short term and not in the medium to long term, the headwind for equities should be limited. Over the course of Q1, we have been overweight commodities, specifically base metals, as they should benefit from a potential overshoot in the global economy. As a contrarian anchor, we remain positive on gold in the medium term. Gold is a good diversification against a rapid increase in equity market volatility, and should also serve as a good insurance against the biggest monetary policy experiment of modern times.
EQUITIES
Global
US
Europe
EMs
Japan
Total
bonds
EM Corp. USD
EM Gov.
Dev. Market Gov.
High Yield
Corporate
BONDS
ALTERNATIVES
Other
Hedge Funds
Gold
Commodities
Real Estate
equities
Key takeaways • • •
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A look into the future: The strengthening case for investing in Asia
As a key player in the global supply chain, China’s economic progress will have an impact on the future direction of the world’s largest trade bloc, the Regional Comprehensive Economic Partnership, and the global economy. Several secular trends are paving the way for growth in Asia, including digitalisation, cloud computing and e-commerce. Identifying those companies with the potential to generate consistent, solid growth, supported by durable growth trends, will be key for successful investing.
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Julie Dickson, CFA Investment Director
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explore the different outlooks
30
01
02
Our main tactical asset allocation change of the year so far has been a relative value trade moving to overweight developed equities and underweight high yield. The range of outcomes implied in respective pricing suggests a potential asymmetry to exploit. Recession exits tend to be a very favourable environment for equity returns, sometimes for up to two years. There is also some evidence that equities tend to outperform high yield during the recovery phase of the business cycle.
Barclays Investment Solutions
03
We have maintained our positive view on equities, but viewed Pfizer’s vaccine announcement as a game changer. The global economy is likely to recover to pre-pandemic levels because social distancing will not be required anymore. That drives us to have more conviction and we have now overweighted this asset class. Nevertheless, our view on equities has changed and we believe that 2021’s winners will be among 2020’s losers. Our bet rests in cyclicals, value stocks and small caps. This could favour European indices because these kinds of companies are more abundant here.
BBVA
We have moved towards a more cyclical stance within our equity portfolio with an overweight to financials and industrials and an underweight position in consumer staples. Probably our main contrarian call is the underweight to energy. This is to a large extent driven by the structural challenges we see for the sector.
ABN Amro
ABN Amro Barclays Investment Solutions BBVA BNP Paribas WM CA Indosuez Citi Commerzbank Credit Suisse Danske Bank Deutsche Bank Edmond de Rothschild Fideuram Handelsbanken HSBC PB ING J.Safra Sarasin Julius Baer LGT Lombard Odier Natixis WM Pictet Rabobank Rothschild & Co. Santander PB SEB PB SocGen UBP UBS UniCredit Vontobel WM
04
Our biggest move has been a shift to a more positive stance on real estate, while being negative on US big tech exposure. We are positive on precious metals exposure and also copper and tin. More broadly we are very positive on UK and Japanese equities and underweight Italian sovereign bonds.
BNP Paribas WM
05
We have been increasing our exposure to value and cyclical stocks since November to benefit from the reflation trade, vaccine/reopening trade and steepening yield curves. Specifically we have increased exposure to: Europe and US value funds; UK equities; Southeast Asian equities; and structured products on European banks and energy. In late January, we decided to reduce our conviction on Chinese equities during a strong momentum phase but we are now starting to build back our exposure to domestic Chinese equities and think the secular growth investment case remains intact.
CA Indosuez
06
We increased both our equity overweight and fixed income underweight. In an environment of financial repression, with central banks leaving interest rates low and below inflation levels, inflows into equities are high. Further equity support comes from reasonable valuations and strongly rising earnings. Within equity we are expecting a reversion to mean, so it’s important to rotate into areas that have underperformed. This includes cyclicals, value, mid-caps, high dividend yielders and high dividend growers, and global diversification into areas like Asia and the UK.
Citi
07
We have moved from a growth-oriented bias in equities to a clear value bias, but believe that the time of a growth revival will come within the next three months. We believe that commercial real estate can offer a lot of defensive value, especially in areas most hit by the pandemic, such as hotels and offices.
Commerzbank
08
The Credit Suisse investment committee decided in early March to reduce emerging market equities, and thus equities overall, to neutral. Though the mid-term return outlook remains attractive, the risk of a further rise in bond yields suggests some caution in the near term. We keep a more moderate cyclical bias by staying overweight the broad commodity index. Within equities, we expect outperformance from UK and German equities, as well as the financials and materials sectors on a global level. We expect small caps to continue to outperform large caps.
Credit Suisse
09
We reduced our bond duration exposure significantly during H2 2020 and again in spring 2021. With yields near record lows, expected returns and diversification benefits had worsened. Furthermore, with the outlook for accelerating growth from reopening, pent up demand and fiscal stimulus, we expect higher rates and inflation in the short-term. We are confident in equities. In the liquid alternatives space, we like short-selling volatility, especially in the S&P 500, while being long volatility in European equities. We have a significant exposure to the value factor, which is trading near the cheapest levels in history, in some cases exceeding the dotcom bubble, in our equity portfolios.
Danske Bank
10
Over the past three months we have remained positive on equities and increased our exposure there a little. Our main changes have been on a geographical and sector level. From a bond perspective, our main adjustment was to decrease our duration further. We have also started to take some profit on our investment grade exposure, and have decreased our strong overweight in the asset class. On sovereigns we have remained strongly underweight for six to nine months now. Generally, we favour and are overweight in risk assets.
Deutsche Bank
11
We have reduced our allocation to developed market corporate investment grade and have no exposure to developed market sovereigns (plain vanilla bonds). We have some exposure to inflation-linked bonds and have increased our positions in both China government bonds and Chinese equities as a core asset allocation. Despite a challenging environment for growth stocks we still believe that those linked to megatrends should continue to outperform, as they are less correlated to the overall economy. We think Chinese government bonds, in yuan, are more appealing than developed market sovereigns.
Edmond de Rothschild
12
Our biggest changes were to increase exposure to equities tilted to value, cyclical and small cap players as well as some selected real asset based strategies, such as infrastructure and agriculture. We reduced alternatives just in long/short and in equity market neutral spaces and have maintained our underweight in government bonds. Our strongest convictions remain on some transformative and disruptive trends in digital technologies, new consumers in China, energy transition, sustainable business models, European financial bonds, and real assets. This covers both bonds and equities in listed as well as private investments.
Fideuram
13
We have decreased fixed income positions and invested in alternatives instead.
Handelsbanken
14
We recently made an underweight allocation on Treasury inflation-protected securities because the rise in long-term inflation expectations is, in our view, overdone. There is a risk that clients will go too far in the reflation trade, and end up with concentrated exposure in value stocks, travel and leisure, and small caps, and will not be diversified enough. Value stocks can be value traps if the company is not well suited to the digital and sustainability revolutions, so we have a neutral view on the growth vs value style. We also hold a neutral view on the small- vs large-cap style.
Willem Sels
HSBC PB
15
We have shifted a little from growth to value stocks. This was done via individual stock selection as well as through sectors, where we implemented an overweight in materials at the start of the year and also upgraded financials and energy from underweight to neutral. The biggest move, however, was in regional allocation, where we reduced US equities to underweight and increased European equities to overweight, reflecting the shift from the more growth-oriented US markets to value-oriented European markets. Our deepest conviction is underweighting the duration in our bond portfolios.We have held this position for some time but this year it’s finally paying off.
ING
16
Our biggest change in Q1 this year was to take profits from our overweight in emerging market equities and to reallocate the proceeds into global equities with a bias to value stocks. We think the rotation from growth stocks into value will continue and therefore we have added to our positions in financials which should benefit in particular from a rising yield curve. We continue to like exposure to small caps. Despite the big rally over the last few months we think this segment has further potential. The re-opening after the lockdowns should help smaller companies and lead to a big increase in revenues. Given the operating leverage of these firms, the earnings should surprise on the upside.
J.Safra Sarasin
17
In the first quarter of 2021, in the face of especially challenging markets experiencing multiple rotations, we relied on our robust portfolio construction and have decided to keep our asset allocation unchanged. Despite our quality bias, this has proven a successful strategy. Recently, biotech stocks have come under pressure and concerns about stricter FDA policies and drug pricing reforms have contributed to that. Nevertheless, we confirm our positive strategic view on the rise of data in healthcare triggering major disruptions across the entire industry value chains and structures. Biotech is one of the core sub-sectors to capture shareholder value creation.
Julius Baer
18
At the beginning of the year we downgraded government debt to underweight when 10-year US Treasuries were trading around 90bps. We are sticking to that positioning for the time being. We put more money to work in European equities in Q1 2021 and had already actioned a cyclical tilt within equites at the beginning of the year. Within equities we are overweight the rest of the world versus the US and have more of a value tilt for the time being. In alternatives we favour commodities and private market investments.
LGT
19
We have progressively added to UK, European and emerging stocks, and most recently, to global small capitalisations. In addition, we reduced portfolio exposures to duration-sensitive assets, such as high quality bonds and gold, and trimmed our allocation to Chinese equities, as we expect monetary and fiscal policies there to normalise further. The cyclical upturn has highlighted opportunities in UK stocks. Their valuations stand at multi-year lows, having suffered from years of Brexit-induced uncertainty. In fixed income, we see value in Chinese bonds due to attractive yields, diversification benefits, and further renminbi appreciation.
Lombard Odier
20
Arbitrage from bond to alternative products as described above. We also rotated from growth sectors towards cyclical sectors such as automobiles, leasury and basic resources, but not oil. We believe long-term rates won’t follow the increase in prices. This decrease of real interest rates is likely to favour gold.
Natixis WM
21
In February, we decided to move from neutral to a tactical underweight stance on US Treasuries. This decision reflects the upward pressure Treasury yields are coming under as growth and inflation expectations are boosted by the prospect of a large rebound in consumer spending. As the equity/bond correlation turns positive, hedge funds are becoming an attractive alternative so we have moved to a tactical overweight stance on hedge funds. Within a neutral position on developed market equities, we remain overweight on Japan and the UK.
Pictet
22
We lowered our allocation to high yield bonds (HY) and raised our allocation to emerging market debt (EMD) in Q1. HY spreads are at historical lows, and have declined a lot since our allocation to HY in April 2020. Spreads of EMD have also come down, but they overall are more favourable to HY with respect to valuations. Despite the strong recovery in the US we prefer equities elsewhere based on their big valuation differential and higher expected profit growth. Also markets outside the US are more cyclical and value oriented and could therefore perform well if the recovery takes hold and rates rise a little further.
Rabobank
23
Over the last three months, we have not changed our asset allocation significantly. We have kept our overweight to both equities and fixed income stable since last summer. The only change we have made has been to add cyclicality to our portfolios by increasing our exposure to industrials & materials (by reducing consumer staples) and to Europe (including the UK) by reducing Switzerland. Our biggest conviction is that equities will continue to outperform fixed income, but this is clearly not a contrarian call. Our biggest contrarian call is the fact that we haven't removed our overweight in the technology space as we think that even if these companies suffer from an increase in interest rates, they still have a prosperous future.
Rothschild & Co.
24
Our asset allocation has pivoted towards an overweight position in UK equities as the removal of uncertainty over a Brexit deal should see the risk premium on UK assets attached to that outcome slowly erode over time. UK large caps look like a relatively attractive play on the global cyclical recovery as they have lagged peers. Our biggest conviction inside the developed fixed income universe continues to be high yield based on the combined effects of fiscal stimulus, monetary support and a strong recovery. Higher growth is positive for spreads and higher yields provide a cushion for reflationary fears. We maintain a contrarian bet on gold based on its attractiveness as a risk management tool against potential extreme market shocks.
Santander Private Banking
25
Within global equities, we have moved into global small-cap value and reduced our overweight position in growth companies. Swedish equity is an important asset class for us and we increased the cyclical and value tilt here during the quarter. We made no big changes in our alternatives sub-portfolio when it came to the overall strategy but we did swap a couple of our hedge funds for new ones. All in all, we still favour an overweight stance towards risk and are overweight both equities and high yield bonds.
SEB Private Banking
26
Our biggest change to allocations was to lock in some profits on equity markets in late March, scaling our recommendation back from strong overweight to overweight. Global equities had rallied almost 75% from their 23 March 2020 lows and we judged it was time to raise some cash in portfolios. Judging by discussions with clients, our biggest contrarian call is our overweight on Japan. Tokyo has been in a ‘stealth’ bull market, recently reaching its highest level since 1990, yet many investors remain sceptical, having seemingly given up on the market. Valuations are reasonable (the cyclically-adjusted price/earnings ratio is still below its historic average) and prices are supported by a 2% dividend yield.
SocGen
27
The biggest change we made in our portfolios was rotating some of our growth holding into more cyclical themes to capitalise upon the medium-term global economic recovery. We continue to favour long-term transformational themes such as technology and healthcare, but have been adding cyclicality through global mining companies, small caps in Japan, US banks and selective industrial companies, which should benefit from reopening dynamics and infrastructure investments.
UBP
28
We have maintained an overall risk-on view but have rotated to a more cyclical bias. For example, we shifted our overweight world equities/underweight bond trade to be overweight emerging market equities/underweight bonds. In addition, we have added cyclicality through exposure to small caps, financial and energy equities. In the fixed income segment, we reduced the sensitivity of our allocations to higher interest rates by taking a long-standing overweight in EM USD bonds back to neutral. We also moved to an investment grade underweight and added exposure to high beta US credit with a shorter duration. We expect global growth to accelerate in coming quarters and believe financials and energy will perform well in this environment.
UBS wm
29
We have just implemented a minor move regarding the upgrading of non-eurozone government bonds to neutral from underweight. This was a tactical move given the level already reached by long-term US Treasury yields. We also changed a qualitative assessment on euro investment grade bonds to positive from very positive, as they are still supported by the ECB’s purchases but their tighter spread buffer makes them more vulnerable to rising rates. We are sticking to our preference for emerging markets and European equities and we are increasing our positioning on ESG thematic equities. As for the bond portfolio, we remain underweight duration risk and are becoming more selective in dealing with the credit risk.
UniCredit
Our biggest change was the decision to upgrade commodities from neutral to positive earlier in the year and we still think investor positioning is rather light. Not only do commodities benefit from the cyclical recovery of the economy, they are also poised to gain from supply-demand imbalances after years of underinvestment and provide a positive roll yield as many futures markets are currently in backwardation. We also like the fact that they are less vulnerable to higher yields than equities.
Vontobel WM
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Evolving global trade patterns It has been more than a year since COVID-19 was declared a global pandemic. The start-stop lockdowns that followed the first wave of the coronavirus outbreak made it particularly tough for many businesses and individuals to adapt. While the pandemic continues, a health check on the global economy indicated a strong rebound in trade in the fourth quarter of 2020. [1] But the World Trade Organization warned that the momentum may be short-lived as export orders and automotive products are showing signs of deceleration. That said, global trade remains on the path of growth and development. In November 2020, 15 countries in the Asia-Pacific region signed the Regional Comprehensive Economic Partnership (RCEP) agreement. They include the 10 ASEAN members [2] together with China, Japan, South Korea, Australia and New Zealand. It may be considered early days before the long-term benefits of the trade agreement become apparent, but the RCEP agreement in itself has created the largest free trade bloc in the world. The RCEP member countries together account for close to a third of the world’s population and gross domestic product. [3] The world’s largest trade bloc is now in Asia-Pacific Select regional free trade agreements, based on total 2019 GDP of member countries (in US$ trillion)
China is well-positioned for future growth in both the domestic and global arena China easily stands out among its RCEP peers due to its size. Being a key player in the global supply chain, China’s economic progress will have an impact on the future direction of the trade bloc and the global economy. Recently, the country captured the world’s attention when news broke that it overtook the US as the European Union’s biggest trading partner. This should come as no surprise as China was the first country to shut down its economy to blunt the spread of COVID-19, and the first to return to some semblance of normality. China today has its own highly developed internet ecosystem, following its persistent efforts to strengthen its digital economy and develop its own search engine, social media and e-commerce titans. The nation’s growing middle class continues to drive a powerful transition towards a more balanced economy spearheaded by domestic consumer spending. It is now home to an impressive 989 million internet users. [4] Underpinned by a powerful domestic demand engine, the Chinese government is focused on increasing domestic spending and unlocking the significant savings of the country’s populace, which are much greater than those of Western countries. China’s savings rate is among the highest in the world Pent-up consumer demand could help drive growth as countries gradually return to post-COVID normality
India is the next rising economic power The transformation of the Indian economy is also underway. It is the only country the International Monetary Fund expects to register double-digit growth in 2021. E-commerce, banks and real estate are some of the key sectors that could drive the economic recovery in India following a slowdown in 2019 and a harsh lockdown in 2020. Industrial firms’ aggressive cost cutting during the past few years has laid the foundation for change in the country. Companies have slashed capital expenditure and reduced leverage, while the Indian government implemented the much-needed labour reforms. Bank balance sheets became healthier and interest rates have remained relatively low. Against this backdrop, our research indicates that GDP growth in India may reach double digits in the 2022 fiscal year and possibly stabilise in the 6% to 8% range in later years. India could be poised for stronger growth India GDP as a percentage of global GDP
Diverse demographics, blooming economies The world is ageing, but some countries are faring better than others. According to World Bank estimates, [5] countries with the oldest populations in developed markets include Japan, Finland and Italy, while those on the opposite end of the spectrum include Asian countries such as the Philippines, Indonesia and India. Indonesia has seen remarkable growth in its middle class, which has gone from 7% to 20% of its population over the past 15 years. [6] Although Indonesia is ranked after China and India as the third most populous country in Asia, its GDP per capita is almost twice as high. [7] Furthermore, the country’s internet economy is expected to grow to US$124 billion by 2025. [8] Together with five other Southeast Asian countries (Malaysia, Philippines, Singapore, Thailand and Vietnam), the internet economy of these countries is expected to grow to more than US$300 billion by 2025. [8] South Korea, on the other hand, has a distinctive demographic profile. According to the OECD (Organisation for Economic Co-operation and Development), it is the fifth most educated country in the world at the tertiary education level. [9] However, the country, which has the lowest fertility rate globally, is now combating a rapidly declining birth rate after its population dropped for the first time in its history in 2020. [10] Ironically, index provider MSCI still classifies South Korea as an emerging market despite the advancement of its economy, citing the “lack of convertibility of the Korean won and restrictions imposed by the local stock exchange”. [11] Nonetheless, innovative companies, many of which are now global conglomerates, will likely continue to support its economy. The country was recently ranked first in the Bloomberg Innovation Index, outpacing major economies such as Germany, the US and Japan. [12]
Secular trends that are paving the way for growth in Asia We have been paying close attention to the long-term secular trends that are emerging in Asia whilst developing a deeper understanding of the region’s unique demographic profiles. These are areas where we found some of the more interesting secular growth opportunities:
• Everyday services enabled by mobile technology Among the secular trends that will likely continue to flourish are the growth of digital platforms targeting large and growing consumer bases, particularly through mobile technology. One potential beneficiary of digital adoption in India is Reliance Industries. The Indian conglomerate has built one of the world’s largest telecommunications networks, with a subscriber base of over 410 million, [13] in just a few years. It is also investing heavily in fintech services as levers to further monetise its customers. In the financial sector, the larger private banks have been growing profits and gaining market share. They are well-positioned to scoop up some of the country’s weaker lenders. For instance, HDFC Bank and Kotak Mahindra Bank are leveraging technology, amid the digitalisation of India’s economy, to make faster lending decisions and reach customers in rural areas through mobile apps. Another phenomenon that is being powered by the rapid adoption of mobile internet is an increasing pool of home-grown social media networks. China, in particular, has some of the world’s largest social media networks, despite many of them operating only domestically. Tencent’s app WeChat, for instance, has become a ubiquitous form of communication in China, with more than a billion users. A smaller player, BiliBili, targets China’s generation Z (anyone born between 1997-2012, according to Pew Research Center) with anime offerings on its video-sharing platform and has amassed more than 200 million monthly active users. Mobile internet adoption is empowering billions Number of mobile broadband subscriptions in Asia (millions) [14]
• Secular growth of e-commerce and digital payments It may seem that the lion’s share of the global e-commerce market is concentrated in Western markets, with dominant giants such as US-based Amazon. However, Asia-Pacific is expected to account for over 60% of global retail e-commerce sales in 2020, over three times that of the US. [15] Although e-commerce in some Asian countries is at a higher penetration than the US and Europe, the total addressable market is far greater due to Asia’s larger, and growing population. Alibaba Group, which investors used to refer to as “the Amazon of China”, has grown to become one of the most valuable companies in the world. The e-commerce juggernaut has often grabbed news headlines for racking up billions in sales during its iconic annual 11 November Singles’ Day event, underscoring the strength of Chinese consumers and their growing role in the country’s economic growth. In tandem with e-commerce growth is the increased usage of digital or mobile payments in the move towards a cashless society. In places like China, South Korea and other Asian countries, tap-and-go payment apps have been widely used for years. For example, in China, consumers use payment platforms like Tencent’s WeChat Pay and Alibaba Group’s Alipay, which are considered household names. In South Korea, Samsung Pay and KakaoPay are among the more popular payment apps. India, in particular, has witnessed a sharp increase in adoption of digital payments. Major companies like Facebook, Google and Amazon have been reported to form consortia with local firms [16] to capture a share of India’s growing digital payments market, which Credit Suisse has estimated will reach US$1 trillion by 2023. Elsewhere, Singapore-based Sea Ltd is tapping into both the e-commerce and digital payments markets in Southeast Asia, where such services are in high demand from the young and tech-savvy population. Its e-commerce platform Shopee is one of the most frequently downloaded shopping apps in the region, while its mobile wallet platform SeaMoney is a leading digital payments provider. Asia-Pacific has become the world leader in digital payments Global digital payments revenue
• Growth in biotechnology, with support from the regulators Chinese leaders are pursuing a dual-track approach to enhance its biopharmaceutical industry. First, they are seeking to cultivate a homegrown biotech industry. As an example, domestic start-up Wuxi Biologics has been enhancing its research and development capabilities to accelerate its discovery and manufacturing in biologics. Regulators have also accelerated approval times for cutting-edge therapies, extended patent protections, clamped down on corruption and expanded government spending. The effort is yielding results as foreign researchers with impressive pedigrees, as well as venture capital firms with deep pockets, have been taking an interest in these developments in China. Equally notable, the government is allowing foreign drugmakers to tap into China’s vast market. Regardless of the push to bolster domestic businesses, Chinese leaders want their citizens to benefit from the most effective medications. This has prompted regulators to loosen rules for foreign manufacturers to repeat lengthy clinical trials that they have already conducted in their home markets. Late last year, the South Korean government unveiled plans to expand its biotech industry, one of which involves setting up a biotech human resources development centre to nurture 2,000 professionals every year. [17] Joint research and development between hospitals and companies in the medical device sector will also receive government support. Rokit Healthcare is one company that has thrived on innovation in South Korea’s biotech industry. It created the world’s first sterile, all-in-one 4D [18] organ regenerator, which it named Dr. INVIVO and has successfully tested its diabetic foot ulcers regeneration platform on patients in India.
• The ripple effect from the revival in travel demand Before the COVID-19 pandemic, around 150 million people in Asia travelled for the first time each year. Over the next 20 years, the region is expected to account for around 50% of incremental air traffic, [19] fuelled by the rapidly rising middle class population. If anything, the inability of leisure seekers in Asia to travel during the pandemic has only added to the desire to do so, and there are already signs of strong pent-up demand. The situation in China is a case in point as its domestic air travel has nearly returned to pre-COVID levels after it brought the coronavirus under control. A revival in travel demand in Asia and other parts of the world could have a powerful ripple effect, creating the need for a range of goods and services and helping drive jobs growth across a variety of industries. Among these are aircraft manufacturers, jet engine makers, hotels, casinos and restaurants. In the absence of significant local players to respond to this demand, multinational companies like Airbus and Boeing could potentially benefit as the commercial aircraft duopoly can fill the gap when global air travel resumes. Air travel is a secular growth industry, supported by Asia’s emerging middle class Annual number of flights per capita
Thriving in a post-COVID world Should investors expect more volatility in the years ahead? Many companies in industries that have been hit hard during the COVID downturn have seen a pick-up in valuations as markets priced in a global recovery on the back of the vaccine rollout. In light of the current market environment, finding companies with the potential to continue generating solid growth in the future while supported by durable growth trends like digitalisation and global payments will be key. However, a greater dispersion of company valuations can be expected when market volatility returns. When that happens, prudent stock selection will help investors identify the potential winners.
Data as at 16 November 2020. GDP: gross domestic product. Sources: World Bank Group, Statista
Latest data available as of 31 December 2019. GDP: gross domestic product. Source: The World Bank
Source: International Monetary Fund, World Economic Outlook Database, October 2020. GDP figures on a purchasing power parity basis. Actual figures as of 2020; forecast to 2025.
Based on latest available data as at 9 March 2021. Source: International Telecommunication Union (ITU)
For illustrative purposes only. Source: World Payments Report 2020 from Capgemini. 2020-2030 are estimates. Figures reflect all non-cash payments. No third party whose information is referenced in this report under credit to it, assumes any liability towards the user with respect to its information.
Data as at 2018. GDP: gross domestic product Annual number of flights per capita, source: World Bank and CIA World Fact Book GDP per capita, source: Airbus
1. According to the World Trade Organization’s Goods Trade Barometer report dated 18 February 2021. 2. Member states of the Association of Southeast Asian Nations (ASEAN) are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. 3. Data as at 25 February 2021. Based on 2019’s data, RCEP accounts for 29% of the world’s gross domestic product (GDP) and 30% of the world’s population. Source: The World Bank 4. Data as at 3 February 2021. Source: China Internet Network Information Centre (CNNIC) 5. Data as at 2 March 2021. The World Bank staff estimates based on age/sex distributions of United Nations Population Division's World Population Prospects: 2019 Revision 6. “Aspiring Indonesia – Expanding the Middle Class” by the World Bank, published on 30 January 2020. 7. Gross domestic product per capita of Indonesia and India was at US$4,135.6 and US$2,099.6 respectively in 2019. Source: The World Bank 8. Collectively, the internet economy of Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam reached an inflection point after the region’s gross merchandise value hit US$72 billion in 2018 and is expected to grow to US$309 billion in 2025. Report: e-Conomy SEA 2020. Sources: Google, Temasek, Bain & Company 9. Based on 2019 data. Source: OECD 10. As at 3 January 2021. Sources: Yonhap News Agency, South Korea’s Ministry of Interior and Safety 11. MSCI press release “Results of MSCI 2016 Market Classification Review” published on 14 June 2016. 12. Data as at 3 February 2021. Source: Bloomberg 13. Data as of 30 September 2020. Source: Reliance Industries 14. Data as at 2019. Source: World Bank. Asia total includes China, India, Korea and ASEAN 15. Source: eMarketer, May 2020 16. Bloomberg’s article “Ambani to Partner Google, Facebook to Seek India Payments Business License”, 1 March 2021 17. As at 19 November 2020. Sources: BusinessKorea, South Korea’s Ministry of Trade, Industry and Energy 18. 4D bioprinting precisely dispenses living cells and biomaterials layer by layer, creating structures that follow native human tissues and biological systems, which are often further incubated to proliferate, mature and change over time. This dimension of time makes the bioprinting 4D. Source: Rokit Healthcare 19. Source: Boeing Commercial Market Outlook 2020-2039
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Julie Dickson is an investment director at Capital Group. She has 27 years of investment industry experience and has been with Capital Group for five years. Prior to joining Capital, Julie worked as the head of client portfolio management at Ashmore Group. Before that, she was the head of client portfolio management at Aviva Investors. She also held various positions at Axa Rosenberg, Mellon Global Investments, Barclays Global Investors and Merrill Lynch. She holds a bachelor’s degree in business management with concentration in finance from Cornell University. She also holds both the Investment Management Certificate and the Chartered Financial Analyst® designation. Julie is based in London.
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