Jasmine Duan, investment strategist, RBC Wealth Management – Asia shares his views with Asian Private Banker in ‘The Final Word’, a year in review by the region’s private banking leaders as they share their thoughts and opinions on key issues around industry trends, investments, regulations, and technology in 2021, as well as providing their predictions for 2022.
The last 12 months have been volatile for investors in China, from the meltdown in the high-yield bond sector to regulatory actions targeting sectors such as technology. How are you advising clients to invest in the world’s second-biggest economy in 2022?
China’s zero tolerance policy on COVID-19, declining property prices, and a flexible and accommodative central bank all make it stand out compared to its Western counterparts.
While valuations have become attractive, we would hold off adding to China equities at the moment due to challenges such as the COVID-19 resurgence, economic slowdown and property market turmoil. An opportunity to add to exposure is likely to emerge after 1Q22, when investors see signs that this round of COVID-19 outbreak starts to recede and have clearer ideas of the earnings impact from the recent macro and policy changes. When the time comes, we would look at opportunities benefiting from secular growth trends, such as electric vehicles, renewables and advanced manufacturing.
We believe the volatility in the China bond market that began in 2021 — due to efforts to step up economic reforms — has a high likelihood of persisting into 2022 as policies remain uncertain across sectors. In particular, the deleveraging campaign focusing on the property sector has led to high volatility as it makes it difficult for corporates to refinance. Unlike previous cycles where the government fine-tuned its policies after a gradual correction started, to date, it has refused to alter its policy. The delay in policy response from the government has added volatility to China’s property developers as refinancing is becoming increasingly difficult. Until the government softens its policy significantly, we believe investors should exercise caution when investing in the sector.
What will be the key investment themes that shape both global markets and those in the region in 2022 and how is that feeding into how you advise clients?
RBC Wealth Management is positive on ‘Sustech’ stocks in the medium to long-term, namely technology companies that can help to solve global sustainability issues. We see SusTech as centred on five key themes: GreenTech, HealthTech, FinTech, FoodTech/AgriTech and Smart Cities. These five themes illustrate innovative solutions that seek to future-proof the planet for generations to come. We believe companies that are at the forefront of these technologies will benefit and thus we will look for opportunities to accumulate after each correction.
The green transition is a key investment theme that we think investors should still pay attention to in 2022. As the world pushes toward aggressive carbon reduction goals, the green energy transformation could represent a grand economic realignment rivalling the industrial and information revolutions. Yale Professor William Nordhaus estimates it would take roughly US$100 – US$300 trillion in new capital on a global basis to reach net-zero emissions by 2050. There is little doubt in our minds this would bring opportunities for investors.
However, we encourage investors to be realistic and have longer-term investment horizons for these types of investments, as the transition to green energy could be bumpy, exemplified by the energy crisis in Europe and China last year. In addition, segments of populations could push back on carbon reduction initiatives if they negatively affect household finances or employment opportunities. New technology requires adaption, may experience occasional challenges and may require more time to play out. But for investors with higher risk appetite and a longer term investment horizon, investing in these companies may be a good source of outsized return for their portfolios.
One of the most-repeated views over 2021 was that the ‘60/40’ portfolio is dead, given the ultra-low to negative yields offered in many parts of the sovereign bond markets. From alternatives to commodities to private credit, how are you helping investors to allocate assets in what was traditionally the fixed income part of their portfolios?
We think of 60/40 as a vast simplification and an industry shorthand as opposed to a practical way to manage investment portfolios. For example: where does a completely unconstrained emerging markets fixed income strategy fit in a 60/40 model? What about convertible bonds? What about carbon? The number of portfolio tools and ways to implement has expanded significantly over the years to meet differing investors’ objectives.
There’s a clear evolution towards portfolio risk allocation as opposed to asset allocation, which is a more comprehensive and flexible approach to managing the risk in portfolios. With markets vulnerable to both a rates shock and a growth shock, simply allocating 40% to bonds, or more correctly to rates, no longer offers the same level of protection to equities and is therefore less useful as a portfolio tool. To counter this, there are many other portfolio tools available, with the most obvious being using puts for downside protection. However, just like fixed income rates exposure, it’s not something you want to hold at all times, rather puts are just one tool that can be used at different stages in the market cycle to help manage total portfolio risk.
We equally advise clients to look into private credit, which is a relatively new area for some investors. Private credit assets under management have grown to US$1 trillion and continue to edge closer to the US$1.6 trillion US high yield market. Private credit offers good diversification, low correlation to traditional fixed income and attractive yields. Private credit is also less affected by rising rates. Amid a 2022 backdrop of rising short-term rates, private credit will likely offer a significant buffer over publicly traded high yield or leveraged loans. But it is only suitable for clients with an appropriate risk appetite.
Sustainability is higher up the agenda for investors than ever, with last year’s United Nations COP26 event underscoring the scale of effort needed to achieve global net zero emissions by the middle of this century. How are you helping your clients to remove ESG risk from their portfolios and embrace sustainability in their investment strategy?
Data are crucial and we have been working with ESG data providers such as Sustainalitics and Impact Cubed and will work with more data providers this year. From a portfolio perspective, we can currently generate ESG and climate reporting of a portfolio compared to its benchmark. The ESG data allow us to measure Value at Risk from a climate perspective. Furthermore, we can conduct scenario analysis to understand how global warming can affect each company and analyse how much each company is contributing to the heating of the planet.
We believe that climate change creates opportunities and risk for portfolios, and our portfolio management team does all it can to capture the opportunities and mitigate risks early.
Meet 2021’s industry leaders in the full round up of of Asian Private Banker‘s The Final Word 2021.