Investors should steer clear from holding strong convictions as the global investment landscape undergoes rapid changes, leading to a gap between underlying assumptions and reality, the chief investment officer of AXA’s India insurance joint venture unit said.
In a fluid operating environment, institutional investors will likely find it easier to stick to their time-tested strategic asset allocation models.
However, “these models need to be checked against the real world,” Rahul Bhuskute, CIO of Bharti AXA Life Insurance, told AsianInvestor.
“You have to see if the basic assumptions remain the same. For instance, [the assumption of] low interest rates – I don’t think we will see low interest rates for the next few years and the [allocation] model needs to account for that.”
That will require asset owners to reassess their allocations and figure out whether the correlations between assets still hold under an increasing interest rate regime.
Bharti AXA Life Insurance is a joint venture between France's AXA and India's Bharti group.
CHECKING THE HYPOTHESIS
A higher interest rate environment is also different from the zero-to-low interest rates that prevailed for the last decade or so.
“From that perspective, don’t become a prisoner of conviction. Having strong convictions might not be the best strategy, especially without checking your hypothesis on a regular basis,” said Bhuskute.
Globally, some countries are also growing more nationalist and conservative, which are also affecting investment decisions, he noted.
That's a view echoed by several analysts.
“…. in recent years, new forces have emerged to stall the progress of world trade, and in some cases even reverse it,” noted Azad Zangana, senior European economist and strategist at Schroders said in a note published in June.
The ensuing new world order is challenging globalisation. It is encouraging multi-national companies to re-shore, or near-shore overseas production as well as redirect investment into other “friendly” lower risk countries, so-called “friend-shoring”.
Geopolitical tensions have been rising for some time, especially between the US and China.
These politically-driven restrictions have forced many companies to re-think and even change their operation plans.
The Covid pandemic also highlighted the fragility of supply chains, and the danger of having too much production concentrated in a particular country or region. Countries are now seeking to diversify production, Zangana said.
“However, shifting manufacturing locations, setting up new factories, and potentially even contributing to the creation of infrastructure all adds to costs, and inflation.”
All these should give investors reason to pause and assess their investment assumptions.
“The investment playbook was constructed for a macroeconomic environment that might not be true; there are significant tectonic plate shifts happening in geopolitics, economics and the investment world,” said Bhuskute.
“The higher-for-longer interest rates theme continues into 2023. That phenomenon is having an impact on every asset class right now. Ultimately there is an opportunity cost for any asset class,” said Bhuskute. Other investors such as William Chan, CIO of HKBC Life have also cautioned that investors may be over-optimistic in expecting US rates to fall later this year.
Still, with higher interest rates, investors are also increasing debt allocations, he said.
“With low interest rates for a long period of time, yield never came into play, especially for long term investors like pension funds and insurance companies. It’s heartening to see yield come back. Debt allocations are likely to go up, and they’ve already gone up,” Bhuskute said.
“We continue to be cautious on equities but we are less bearish on bonds because Indian real rates have turned slightly positive. It’s still not where we would find a lot of conviction but at least we seem to have turned a corner.”
Indian real rates turned positive – about 1% -- for the first time since Covid-19 began in early 2020, the central bank said in February this year.
Higher cash levels are another theme the CIO sees at play. “Investors are rediscovering the benefits of cash as an asset class,” he said.
Globally, there is a similar trend of investors piling into cash or cash-like assets, such as money market funds, prompted by market uncertainty and extreme volatility.
Investors held a near-record level of assets – more than $5 trillion – in money market funds, according to the US-based Investment Company Institute.