The Dutch pension asset manager's Asia Pacific head of real estate says his team has just had one of its busiest years ever and that 2021 is looking similarly promising.
Chew oversees a team of strategists, portfolio managers and investment professionals based in Singapore and Hong Kong who specialise in Asian markets, fixed income, funds and alternatives. She shares her current market views with AsianInvestor, and how she and her team are advising clients to invest amid the current market volatility and uncertainty.
What is your outlook for the global equities and fixed income markets this year?
Chew: We expect a weak first half for the US economy, possibly a recession but it is unlikely that we will experience a global recession. In most cases, investors tend to be more cautious as their mindset has changed quite a bit given current market volatility.
In the coming months, we expect more volatility in the equity market, characterized by unusual spikes. Theoretically, there would be setbacks and opportunities with the given market climate. This is typical of an end to a period of strong economic growth and market returns. Additional pressure was exerted by the credit market excesses and concerns over the write-downs in the banking sector.
US equity valuation levels are attractive on a risk premium basis relative to bonds compared to over 20 years ago. Dividend yields are higher than two- and five-year Treasury yields. However, in a downward earnings cycle, stock prices tend to struggle to move higher. At this stage, we are experiencing decelerating earnings growth.
In the short term, negative news-flow from the financial sector is not expected to be over. Sentiment will continue to be driven by market expectations regarding the extent of the US recession, subprime exposure and also central bank policy.
Do you have any specific projections in terms of returns from equity markets?
We forecast a -5% to +5% return for US, Euroland (Europe ex-UK) and UK equity markets on a three-month horizon. The recovery of the financial sector in the US and Euroland is crucial for a pronounced and sustained recovery of the developed equity markets. Asia and Latin America are expected to perform within a higher band at -5% to +8% on a three-month horizon.
The forecasts for equity markets performance are 10-16% for the US, 8-13% for Euroland, 6-10% for the UK and 6-13% for Japan on a 12-month horizon. For Latin America and Asian equities, forecasts have been set higher at 10-17%, due to higher growth and earnings. In the long-term, equity markets will further benefit from globalization with its increasing global competition, emergence of new sales markets, higher productivity and the dynamic growth in Emerging Markets. We are also expecting strong investment interest by sovereign wealth funds.
What about returns from fixed-income markets?
As expected, bond yields have fallen due to a volatile financial environment and the flight to quality on financial markets. Given that the banking sector balance sheets are not fully restored in the short term, bonds yields could range trade at current low levels.
But assuming that the mortgage and credit market uncertainties stabilise, yields are expected to be somewhat higher on a 12-month horizon as they normalise. Thus, bonds will continue to underperform risky asset classes on a medium and long term view.
Bond yields of the 10-Year US Treasuries of 3.50-4.00% on a three-month and 4.25-4.75% on a 12-month horizon are expected. In Euroland, yield levels should trade at levels between 3.75-4.25% and 4.25-4.75%, respectively.
What are your major investment themes for the medium- to long-term?
Asian growth, climate change, and agribusiness.
We continue to recommend climate change, agribusiness and infrastructure as thematic overlays to the traditional geographical allocation of stocks. These themes focus on longer-term trends that are less correlated to current business cycle considerations.
The outlook for agricultural commodities is supported by rising incomes in emerging markets with demand for food, especially protein, weather-related supply disruptions, low inventories, competing demand from bio-fuels and lack of arable land. Possibilities include shares of companies in agribusiness, or funds that invest in agriculture commodities.
Over the last six months, we have added agricultural commodities and gold to our balanced portfolios. Asian weights continue to steadily build up on pullbacks with some allocation to infrastructure. In portfolios where risk budgets have been set, what we call our unconstrained portfolios, we have added protection to our equity market exposure.
How can investors gain access to and benefit from the Asian growth theme?
We have maintained that exposure to the Asian and Middle-Eastern consumer should remain one of the key components of any portfolio. Positives include sustained currency appreciation which favours the consumer and penalizes the producer, economic growth and rising incomes which broadens the middle-class, collapses in distribution costs as infrastructure improves and demographic transitions in a number of countries where vast numbers move from the countryside to the cities, fuelling productivity gains.
Potentially, Asian clients should consider core portfolios with a significant weight in broad Asian, Chinese and Indian equities, and specific infrastructure or private equity opportunities on a portfolio asset allocation basis.
What kind of opportunities are you seeing from climate change?
We have witnessed rising temperatures, significant changes and disruptions to weather patterns. This is a long-term trend which has implications on how companies are run and where profits can be reaped, and extends beyond shorter term business cycle considerations.
The key focus areas are the reduction in greenhouse emissions via cleaner technologies and energy efficiencies, and environmental management. There are many climate change funds focusing on industries in forestry, agriculture businesses, water, clean energy, emission-efficient power generation, consumer electronics, environmental technology and water treatment. They should benefit from changing legislation and evolving consumer preferences.
As with all new investing themes, there is the risk of too much money joining the bandwagon driving prices to unrealistic levels. To mitigate such occurrences, a keen sense of specific business models, changing legislation, valuations and monitoring of company data are essential in running such portfolios successfully.
What are the drivers of agribusiness growth?
The key drivers for this theme are population growth, rising income, limited arable land and global warming. Rising demand for food requires higher efficiency in the agricultural business as farmland per person is declining. Agribusiness broadly covers everything from agricultural commodities to consumer products, such as seeds and fertilizer, land and plantations, water, machinery and farm products. Given this is a relatively new investment theme, there is a lot of untapped potential here.
What are you currently advising clients amid the volatile and uncertain times?
Clients are advised to hold well-diversified portfolios calibrated to their return and risk level. Asset allocation is still key and private bankers should advise clients on the importance of diversification across various asset classes, geography, securities and currencies. We maintain that a significant exposure to Asian assets is beneficial over the medium-term. Balanced accounts with bonds, equities, cash, and alternatives including commodities have held out well in market upturns and downturns.
Underlying assets should focus on quality. For example, for the securities that fall within the asset allocation buckets, one should theoretically select companies with a sound business model, strong management and healthy cash flow. ClientsÆ liquidity requirements and unique circumstances make for different solutions for each individual.
There are also absolute return strategies that offer a cash-plus return. These include low-risk diversified fund of hedge funds with robust manager and strategy selection. Typically these funds of funds have about 20 underlying hedge funds and are not exposed to single-manager risk.
We expect outperformance of hedge funds against bonds and equities. We suggest that investors should consider allocating about 20% of their portfolios in such low-risk fund of hedge funds. This takes into consideration that we have a good range of low-volatility to medium-volatility fund of hedge funds with a fairly robust track record.
HavenÆt some hedge funds suffered from the subprime mess?
While some single-strategy hedge funds have been in the headlines due to exposure in mortgage-related assets and excessive leverage, the contribution of the asset class need not be diminished if the selection of the underlying strategies such as long-short, global macro, event-driven, relative value etcetera go hand-in-hand with robust manager selection and due diligence.
How are you advising clients to deal with rising inflation and the weak US dollar?
Opportunities include diversified inflation hedges via holdings of commodities, equities, treasury inflation-protected bonds, agriculture and livestock.
Precious metals like gold hold out well. Gold is an asset class playing its traditional role as a store of value, and acts as a hedge against financial distress and potential inflation. Low interest rates reduce the opportunity cost of holding gold which does not provide a yield.
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