HSBC Life, APG: How inflation is changing asset allocations

Understanding the relationship between asset prices and inflation is more crucial than ever for investors, but using data from the last decade to calculate asset correlation may not be wise, said HSBC Life’s CIO.
HSBC Life, APG: How inflation is changing asset allocations

Amid the current financial landscape, deriving an asset's correlation to inflation demands a far more nuanced perspective than simply relying on data from the past 10 years, according to William Chan, chief investment officer at HSBC Life.

“In this new environment, the assessment of what constitutes a low correlation needs to be made quite prudently and you need to look at diversifying into assets that will be favoured by the macro scenario as opposed to relying on statistical data from the previous decade,” Chan said on a panel at AsianInvestor’s 18th Asian Investment Summit

"While investing in assets with a low correlation to inflation is critical to building a resilient and diversified portfolio, the equations used in the last decade to find such assets may not be as useful in the current high inflationary environment,” Chan said. 

William Chan,

“Since the global financial crisis, we have gone through mostly a low-inflation and low-interest-rate environment. So the asset correlations we have calculated during the last 15 years are based on those market conditions — but that environment is quite different to what we are looking at now,” Chan said.

Chan highlighted that the drop in fixed income last year in tandem with equities — to a greater extent in some cases — took many investors by surprise, as they thought they were diversifying their risks.

“As investors found out, this diversification strategy was ineffective as we moved into a different macro-economic scenario of high inflation and low growth,” he said.


Thijs Aaten, CEO of APG Asset Management Asia, believes that when looking at portfolio diversification, the private markets — particularly real assets — continue to offer interesting returns that should not be overlooked even in times when bond and equity markets seem more attractive.

While the current situation may suggest otherwise, having real assets protects investors against unexpected events, making them an attractive option for long-term investors like the €547 billion ($577 billion) AUM Dutch pension manager, according to Aaten. 

Thijs Aaten,

“Real assets, such as toll roads, are interesting assets in an inflationary period because they have been paid for, and while you do need to do a bit of maintenance, the fees for the assets are increased in line with inflation,” Aaten told AsianInvestor’s audience.

While correlations based on asset prices have provided a good indication for defensive assets over the last decade, Aaten agrees with HSBC’s Chan that the financial landscape has changed.

There are, however, a couple of fundamental trends that should not be ignored when considering investments, he said.

Factors such as demographics and the ongoing climate transition are having a significant impact on the real economy, and investors should pay close attention to these trends more so than on traditional correlation analysis, he said.

According to Aaten, a more holistic approach to investment analysis is needed: for instance, one that takes into account not only short-term market trends, but also long-term factors that are shaping the world around us. This includes demographic shifts that are changing the face of consumer behaviour and the rise of renewable energy as a key driver of economic growth.

"Ultimately, it's not just about mathematical correlations and asset prices," Aaten concludes. "It's about being part of a larger conversation about how we can build a more sustainable and resilient economy for years to come."

"A lot of these trends are not things that you can fight against," Aaten notes. "Instead, you need to be able to adapt to them and take advantage of the opportunities they present."


For the past four years, investment in private markets has been all the rage for investors, from large asset owners like insurers and pension funds all the way down to boutique asset managers, according to Andrew Hendry, Singapore CEO and head of Asia distribution at Janus Henderson Investors.

Andrew Hendry,
Janus Henderson Investors

“But looking at private markets as the panacea to solve the complexity of having to make decisions in the public markets is quite incorrect,” Hendry told AsianInvestor’s audience.

Hendry believes that over the next year, the rush of capital into the private markets, particularly in the semi-liquid space, is going to yield some unfortunate consequences for many investors.

“Many of the private banks have been pumping billions into the private REITs market and into the private credit market, but at the end of last year many investors wanted to exit the markets because of the interest rates and rapidity of hikes, which has created a lot of dysfunctionality,” said Hendry.

Asset owners need to be examining whether their investment platforms are flexible enough, according to Hendry, who said that his team has been observing many of these large institutional investors either starting or expanding their hedge fund programs to deal with current conditions.

“Two years ago, no one wanted to talk about diversified alternatives, and tail risk hedging. But last year, it was the only conversation we had at the CIO level with our asset owner clients.”

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