Asset allocators in Asia will continue to try to boost returns at the margins of their active portfolios this year in light of generally low yields and high levels of uncertainty, say senior fund industry executives.
A year that carries so much uncertainty at a political level – with a new US president-elect in the form of Donald Trump, elections across Europe and the ongoing challenges of Brexit – will colour investors’ judgement above all, causing cautious investors to revise their global allocations, says Kirk West, global head of international business at US fund house Principal Global Investors.
For the first three months of 2017 at least, investors' main focus is widely expected to be on the US and the nature and impact of Trump’s economic policies, and his pledge to wage a trade war with its largest trading partners, China and Mexico.
“Our view is that, even if some of Donald Trump’s policies are protectionist in nature, they will be earnings-friendly and will be a boost to US growth and therefore global growth,” Sydney-based West told AsianInvestor.
When it comes to allocations, institutional investors in Asia – particularly pension funds and insurance firms – have liabilities to cover, so they will continue to seek out higher-yielding assets, said West. “So you will continue to see higher allocations to credit strategies, and that’s fine in a rising earnings environment.”
There will also be more interest in capturing the illiquidity premia available from private-market assets such as real estate and private equity, he noted. Tactical shifts based on bond duration will also continue.
Meanwhile, high-net-worth individuals will continue to make more use of outcome-based investment strategies, suggested West (pictured right). “If I say to you that over the next three to five years a product is designed to give you 6-7% net of fees, with minimum volatility, then you don’t really care what the benchmarks are doing.”
And investors can continue to capture margins, by combining active with passive strategies, he added. Ultimately, “the client won’t care what fees they are paying, as long as the manager delivers”. That is, of course, easier said than done.
The Trump effect
Trump’s programme is aimed at rebuilding the core strengths of the American economy by giving a strong boost to the health of US businesses and households, noted John Greenwood, chief economist of fund house Invesco. However, he suggested most of the incremental growth in 2017 would not be driven by fiscal stimulus, tax cuts or infrastructure spending, but by the strengthening business cycle upswing.
“The recovery in the US, although already seven-and-a-half years old, is only now starting to take on the typical characteristics of a normal recovery: banks have been providing credit instead of the Fed, businesses and households are in good financial shape and can resume normal spending momentum,” he said.
But there remains the question of how – and how fast – US stimulus measures will be rolled back.
It is Trump himself, rather than the US Federal Reserve, who has called for an end to quantitative easing (QE), said Tobias Bland, chief executive at Hong Kong-based asset manager EIP. “If we are now going to have some sort of reverse of QE, then there’s a whole slew of different assets which need to re-adjust; that includes property, equity markets and credit.”
Greenwood (pictured left) believes the economy may be able to shrug off interest rate normalisation and, if so, the US economy could keep expanding for several more years before the business cycle hits a peak.
Ultimately, though, by the end of 2017 the market euphoria over Trump’s pro-growth proposals may well fade as political realities bite.
Desmond Lachman, a resident fellow of the American Enterprise Institute, in a paper from the Official Monetary and Official Institutions Forum, said: “My primary concern is that the Trump presidency comes at a time when the world economy is still drowning in debt.”
EIP's Bland also flagged concerns over debt, but specifically in the US. “Trump’s policies might boost growth, but he’s going to spend $6 trillion dollars doing it. That’s going to take the budget deficit from $21 trillion to $27 trillion, which is unrepayable. There’s no economist that could tell you how any of this debt is going to get repayed, except for by cancellation. Then you are going to have a massive run of inflation.”
The sick man is Europe
In the second quarter of this year, the focus may shift from the US, said Principal's West: while Trump is an unknown quantity, Europe is where the chief concern lies.
“We’ve got some big elections coming up in France, Germany and the Netherlands,” he noted. “If the French presidential election [to take place in May] follows the populism [right wing] trend, that would create issues around the further breaking up of the EU. It may not happen, but the uncertainty is a concern for markets.”
The Netherlands and Germany are due to hold general elections in March and September this year, respectively.
Greenwood agrees the outlook for Europe is not looking very favourable. “Unemployment across the continent has only fallen below double-digit levels since September and income growth remains anaemic.” This is fuelling populist political sentiment, he noted.
He forecast Eurozone real GDP growth of 1.2% and CPI inflation of 1.1% for 2017 due largely to the weaker value of the euro – which falls well short of the ECB’s target of close to but below 2%.
Moreover, the ongoing Brexit fallout will slow Britain’s real GDP growth, particularly foreign direct investment into the UK, said Greenwood. He forecast UK real GDP growth of 1.5% for 2017 and consumer price inflation to rise gradually towards 3% during the year.