If 2018 underlined the dangers of being overly reliant on equity markets, this year could demonstrate the opportunities for long-horizon asset owners.

As recent financial results from Japan’s Government Pension Investment Fund and Korea’s National Pension Service (NPS) reveal, last year was a bad experience for asset owners in countries with depreciating local currencies and a reliance on overseas equity flows. The world’s first and third-largest pension funds both recorded annual investment losses for 2018, and poor equity performance was in large part to blame for these squalid returns.

2019 has yet to offer much certainty too. For the first two months of the year, investors have been preoccupied with uncertainty over US interest rate movements, the ongoing US and Chinese trade war, and fears about too much debt among American companies.

And yet, this year could offer some interesting opportunities for investors that genuinely live up to their claims of being long-term minded.

Take Chinese equities. The market enjoyed a strong upsurge during January and February, seemingly because investors felt it was oversold in 2018. Yet trade concerns continue to dominate observers and investors into China alike, and have led the country to adjust down its economic growth target for the year. Any signs of an inability by the US and China to reach a trade agreement could derail the current rally.

And yet, China looks set to inevitably overtake the US as the world’s largest economy, and the recent announcement by index provider MSCI underlines the fact that international investors will need to allocate more money towards A-shares over the coming two years.

In addition, bond index providers will bring local Chinese bonds into their benchmarks and thus encourage investor inflows; the Bloomberg Barclays Global Aggregate Indices is already set to add government and policy bank bonds over a 20 month period from April.

And on the geopolitical front, the closer the US election of 2020 looms, the more the Trump administration may want to conclude a comprehensive trade deal with China, to demonstrate its economic prowess.

For investors with five- to 10-year mindsets, such as pension funds and life insurers, allocating a heavier investment into Chinese stocks and bonds looks like an astute move.

BENEFITING FROM BREXIT

Possibilities may exist amid the uncertainty elsewhere, too.

Brexit is a nasty can of worms, with the hapless UK government floundering in its attempt to satisfy hard-right Leavers while not overly damaging the economy. Both the UK and an already-weak European Union could well fall into respective recessions following a Brexit of some description on March 30.

And yet, amid such chaos will emerge possibilities. Collapses in the value of the sterling and British gilts or equities would offer 10-year minded asset owners with a strong stomach some investment possibilities. Similarly, a recession in Europe could throw up assets. Taking a leaf from Warren Buffet’s book and focusing on strongly branded companies that make consumer staples (and ideally offering good dividends) would seem a sensible approach for investors able to weather several months of political and economic noise. 

The US could also offer some possibilities, despite seeing its equity valuations tip into the sort of unseemly high territory that doesn’t appear justified by fundamentals. 

As the Financial Times has reported, fears over US corporate debt levels have led to concerns over potential credit downgrades and caused investors to clamour for companies that focus less on stock buybacks and dividends and more on improving balance sheet health. They offer astute investors some investment prospects, be it through selective bets against businesses, or by  buying on weakness. And it’s possible that restructuring or distressed funds could make some hay amid the tumult.  

Selective domestic emerging market equities and bonds might also be worth some extra focus too, given the possibility that the US dollar could see a period of softening, courtesy of flat rates or even a cut later this year. The key is to ascertain whether the US economy is merely softening, or recession-bound.

As for alternatives investments, asset owners have been keen to diversify, and understandably so given generally better returns. But 2019 might not be the best time to lock money into new private equity or property funds.

Alternatives data provider Preqin believes the world’s private equity funds could have $2 trillion of dry powder, while real estate debt funds look to have done the same as of late 2018. That will likely drive up prices for buyout assets and cause returns to fall. While overall returns could keep outshining public equities, post-fees the illiquidity premium could narrow to very tight levels.

Perhaps the best advice for leading Asian asset owners is to pick themselves up from a harrowing 2018 and add into selective investments this year. Longer-term possibilities exist – if they’re willing to take them.