Jean Chia, CIO and head of Portfolio Management and Research Office, Bank of Singapore 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?
For China, we prefer the onshore A-share market vs. offshore counterparts and advocate a strategy to buy beneficiaries of policy support (such as renewables, new energy, technology and domestic consumption), as well as companies that are cash flow generators and dividend payers.
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?
2022 will be a year of re-calibration for investors globally as inflationary pressures coincide with the withdrawal of pandemic-induced liquidity and gradual paring down of fiscal and monetary support for economies worldwide. Instead, quantitative tightening, interest rate hikes and higher real yields will drive markets into bouts of short-term volatility across asset classes.
Super-impose this macro backdrop against (a) China’s structural adjustments to an economy centred on “common prosperity” (b) a global pivot to focus on net zero outcomes for climate change and (c) a major leap into a digitally-centric economy including re-building a meta-reality beyond our universe. Based on these key themes, we advise portfolio builders to consider the new narrative with the 3Vs in mind: Volatility, Value and Vulnerability.
Volatility: As the tide of liquidity ebbs and the world confronts the realities of an uneven pace of global recovery, we expect capital markets to be volatile. Historically, bull markets do not end at the beginning of rate hike cycles, but short-term corrections are not unusual as treasury yields rise sharply to respond to inflationary expectations.
Investors with well-positioned portfolios need not fear volatility but should be prepared for these bouts with sufficient cash buffers to potentially take advantage of drawdowns to build long-term positions at the “right price.” Appropriate exposure via derivatives by buying options when volatility is low and selling them during periods of elevated volatility could complement overall portfolio risk-return.
Valuations: Equities remain an attractive asset class, considering the positive global economic growth and corporate earnings trends, but a re-balance is in progress. We see a compelling case for real economy sectors in cyclical and value stocks (e.g. financials, industrials, real estate and energy) as investors look for earnings growth, cash flow and resilience against inflationary pressures. Growth sectors, especially early-stage unprofitable technology and new economy companies, may be vulnerable to volatility in the short run, but we maintain core exposure in quality technology companies with business models that play to longer-term tech trends.
Vulnerability: As we confront the US rate hike cycle, returns for fixed income portfolios will be sensitive to both portfolio duration, as well as credit selection that considers balance sheet strength, credit fundamentals and valuations that adequately reward bond holders for the risk. Just as diversification played a key role for us in weathering the storm in China property bonds within Emerging Markets credit, we believe judicious credit selection will be key in 2022 as we remain watchful of risks and vulnerabilities within emerging markets.
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?
Equities and bonds will continue to be core to investment portfolios based on the breadth and depth of the asset classes, which provide relatively liquid and transparent exposure to economies and companies that drive growth. Returns will come from both asset allocation and security selection that combines the twin objectives of generating above market return (alpha) and avoiding risks. Importantly, unlike in the early stages of the liquidity-driven bull market where the rising tide lifted all boats, we enter a mature stage of the market cycle which is characterised by greater dispersion in returns across asset classes, disparity in regions and sectors within asset classes and winners/losers within the same industry.
Alternative investments are becoming an important component of investors’ portfolios. They have demonstrated an ability to improve the risk-return profile of the traditional 60/40 equity-bond portfolio based on historical returns. The largest institutional investors in the world and many family offices currently allocate more than 20% of their portfolio to alternatives. The Yale University endowment – which pioneered the aggressive inclusion of alternative investments – has an allocation of over 75% to alternatives.
Illiquidity, activism by managers and limited access are key features of alternatives that provide additional sources of risk premia and higher expected returns necessary to improve portfolio outcomes as we move through the more challenging phase of the investment cycle.
At Bank of Singapore, the ability to source and access investment opportunities in private equity, private credit, hedge funds and real estate through funds and direct investments has helped bolster returns and diversification in client portfolios during the past year. More recently, the focus on helping clients navigate the inflationary environment and the climate change imperative has led us to add longer duration infrastructure assets and climate-linked opportunities to the range of alternative investment solutions available from Bank of Singapore.
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?
A recent spate of extreme weather events has highlighted the long-term vulnerabilities of many companies and indeed entire countries to climate risks. Post-COP26, strong political momentum around climate change will catalyse a powerful shift in policy and regulation worldwide to cut carbon emissions across all kinds of economic activity. Stricter regulations on the tracking and disclosure of carbon emissions and climate risk exposure, and more aggressive decarbonisation initiatives, including carbon taxes and emissions trading systems, can be expected in the coming years as the financial ecosystem evolves to meet higher environmental standards. Hence, identifying vulnerabilities to climate-related physical and transition risks will be critical for investors to manage risks within portfolios.
At Bank of Singapore, we call this approach R-E-A-P for short (which stands for a Research-driven approach; ESG excellence; rigorous Assessment and P for process and performance). Our research team has produced a rich library of thought leadership pieces on the latest developments and key trends in ESG and sustainable investing, including rapidly emerging risks and opportunities for businesses from fast-evolving policy incentives, regulations and consumer preferences globally. These serve to guide clients on the most important trends in ESG that are gradually reshaping the investment landscape, including the accelerating shift towards decarbonisation of the world economy.
We have been deepening the integration of climate and broader ESG considerations into research recommendations and investment advice to help clients better evaluate both ESG risk and opportunities within their portfolios.
Besides providing MSCI ESG ratings and reports for securities under coverage, our research analysts have highlighted key exposures to material ESG risks and opportunities within their respective sectors. We have set internal targets to ensure that our investment ideas meet minimum environmental, social and governance criteria.
To establish clear governance, Bank of Singapore set up a Sustainable Investment Committee last year to oversee its sustainable investment frameworks and policies. We offer an ever-expanding shelf of sustainability-themed products and investment solutions to clients based on ratings criteria, evaluation of climate-aligned investment processes, ESG factors and thematic opportunities. Bank of Singapore has been the first in Asia to incorporate ESG factors in the assessment of the loan quantum for investment financing.
Meet 2021’s industry leaders in the full round up of of Asian Private Banker‘s The Final Word 2021.
