Stephen Jue, portfolio manager at Allianz Global Investors, shares his insights about the exciting growth opportunities ahead around smart cities.
1. What are the global trends shaping the cities of the future?
Cities are home to more than half of the world’s population and continue to be one of the biggest contributors to global growth. Due to the explosive population growth in urban cities in recent years, our cities face rising environmental pressures and demand on resources. This is creating the need for a new type of city that can be more intelligent, modern, and sustainable long into the future. The convergence of disruptive technologies and new innovations can help our cities meet these needs.
While Covid-19 may have temporarily impacted population growth in big cities, smaller cities have benefited as people wanted more space, lower cost of living or new location. However, the demands on local resources and services aren’t that different whether it’s a big or small city. The importance of digital transformation was critical during the pandemic as it pulled forward adoption of cloud-based services for a work-from-home or live-from-anywhere environment. Technologies such as intelligent apps & services, especially via their role with smarter e-commerce, delivery, and healthcare solutions, are just a few examples of how the pandemic has expedited adoption of smart technologies.
Looking forward, we think that a post-Covid world will not be one that reverts completely back to normal. Instead, it will likely be a flexible, hybrid environment along the continuum to a new normal. The world may have permanently changed for individuals and governments due to the pandemic and corresponding tectonic shifts in daily life. We believe the growth of the smart cities megatrend will only accelerate over the coming years.
2. What types of investments are needed to build intelligent cities?
The entire intelligent cities’ ecosystem encompasses a wide variety of innovative products and solutions. Critical building blocks across next-generation datacenters, smart grid, and intelligent buildings are now being put in place to enable the city of the future. Digital transformation is creating new solutions that can better manage assets and resources more efficiently to improve the quality and safety of city living. New digital apps and smart services that enhance the quality of everyday life in the city are being built on top of this new infrastructure.
The market opportunity for intelligent cities could reach over $3 trillion by 2025. There are now over 500 smart-city projects globally with technology spending of over $100 billion annually. Hundreds of cities worldwide now have significant budgets and are investing to improve city infrastructure, public services, security, transportation, healthcare, etc.
3. What types of investment vehicles should investors consider when investing in intelligent cities?
Thematic investing typically only focuses on publicly traded equities. Over the last several years, we have seen a significant increase in the number of growth companies across sectors issue convertible and fixed income securities to lower their weighted average cost of capital to fund growth initiatives or make strategic acquisitions.
The opportunity to apply a unique multi-asset approach that invests across the capital structure of companies in the intelligent cities’ ecosystem is now possible and thriving. We believe investors can capture opportunities in innovative companies tied to the smart cities megatrend through a combination of equities, convertible and fixed income securities.
A key differentiator of the thematic multi-asset approach is the use of the convertible asset class, which combines the characteristics of stocks and bonds. With the right to exchange into the underlying shares, convertibles offer growth opportunity in rising stock markets while also providing some potential income. Like a bond, they have a stated coupon and maturity, and investors can get their principle back upon maturity. Total return convertibles are the most compelling as they can provide an asymmetric risk/return profile to participate in the upside potential while lowering the downside risks. Also, corporate and high yield bonds issued by companies with improving fundamentals may offer higher yields compared with treasury bonds.
4. How can a smart cities thematic fund sit alongside an investor’s mainstream portfolio?
We believe investors can use a thematic multi-asset fund as complementary to their existing portfolio given the high active share and minimal overlap typically versus other funds. Our thematic multi-asset approach focuses on the three main objectives:
- Potential capital growth from equities
- Resilience from convertible securities
- Fixed income potential from bonds
Under this approach, companies best positioned to benefit from the smart cities megatrend could first be identified based on fundamental research. The most favorable segment of the target company’s capital structure, which includes equities, convertibles, or fixed income securities, that exhibits the most attractive risk/reward profile would then be selected.
With different market cycles in mind, it can be helpful to leverage different asset classes to maximise risk-adjusted returns through a more balanced total return profile. We believe the thematic multi-asset approach is a good way to gain exposure to megatrends like smart cities, which helps investors to weather down markets and still participate in up markets.
5. How can intelligent cities help to promote environment, social and governance (ESG) investing?
Intelligent cities strategy with active ESG risk management may enhance potential returns if E, S & G factors are integrated into the investment analysis and decision making processes.
As cities get smarter, they become more livable and more responsive. Citizens and businesses will benefit from improvements in air quality, convenience, energy efficiency, healthcare and more. Today we are only seeing a glimpse of what technology can eventually do to improve city life. Investors can also feel good by aligning their investments with companies helping to make our future better and more sustainable.
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This material has not been reviewed by the Hong Kong Securities and Futures Commission. Issuer of this material: Allianz Global Investors Asia Pacific Limited.