As clients in Asia are reverting to a risk-off mode following a tumultuous 1H22, Swiss pure-play Pictet is recommending two strategies to hedge against inflation.
One of the strategies goes straight to commodities, whose soaring prices have fuelled inflation, Evelyn Yeo told Asia Private Banker.
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The head of Investments in Asia at Pictet Wealth Management Asia explained that it has been looking at funds and ETFs in natural resources and agribusinesses, ever since the view on inflation changed from transitory to concerning earlier this year.
Pictet has been finding funds and ETFs in real estate as well. Yeo argued that real assets, including infrastructure real assets, offer the potential of some partial inflationary hedges.
“Typically, we see that real assets or infrastructural assets provide some diversification and have a lower correlation to traditional asset classes,” she said. “But they are not 100% inflation hedges — and that is what we are telling clients at this point as well.”
REITs with income visibility
Pictet WM Asia is recommending REITs to clients seeking new sources of yield and income.
“Our REITs mandate offers a diversity of exposure across the different subsegments — such as industrial, hospitality, retail office, healthcare or some specialised REIT,” she said, adding that Singapore REITs (S-REITs) are offering good investment opportunities.
“S-REITs typically pay at least 90% of their taxable income in dividends and could therefore be a good income source,” Yeo noted.
“S-REITs are not expensive from a valuation perspective — with a price-to-book ratio of 1 — and can provide a high 12-month forward dividend yield of 5.8%. The current gearing ratio of 37% is well below the maximum of 50% set by MAS.”
Yeo added that Pictet WM Asia is selective, because in addition to the rising interest rates affecting the mortgage costs of real assets, the higher energy prices too can have an impact on REIT operators.
With rising interest rates, Pictet favours names with strong income visibility, such as those with structural growth opportunities, long-term leases, and the flexibility to increase rents. “The progressive reopening of the economy and the rebound in global travel mean that our preferred sectors are retail and hospitality. But defensive, large-cap industrial REITs (such as logistics and business parks) offer strong income visibility as well.”
Rising rates spurs quest for capital protection
Yeo pointed out that she has seen a surge in demand for capital-protected products, especially during 1H22. Because floating-rate notes (“floaters”) have variable interest rates tied to a benchmark rate, they offer investors protection from rising interest rates.
“The capital-protected floaters [that we offer] are instruments that tap into rising rates without taking on too much risk, with a floor near the current fiduciary deposit rates and the cap set closer to — or slightly higher than — the Fed funds futures prices over the next two years,” Yeo explained. The Fed funds futures prices reflect market expectations regarding future changes in the Fed funds rate.
In addition, partially protected notes such as “twin-win” structured products could equally play on broad market volatility within pre-set parameters and could appeal to investors with a two-year horizon, she said. Twin-win certificates generate a positive return on their investment in both bullish and bearish markets, as long as the fluctuations in the underlying asset price occur within the barriers specified in the prospectus.
Yeo explained that clients consider capital-protected products as basically yield enhancement or cash management types of solutions. Because the losses in their equity portfolios can be hefty, some clients are allocating parts of their cash to these products, even though the cap sets limitations to the upside.
Alts to provide long term investment perspective
Many clients in Asia have warmed to private equity this year. Compared to listed equities, PE is less frequently marked to market, which allows clients a better long term perspective.
Pictet Alternative Advisors (PAA) — an independent alternative investment unit of the Pictet Group — has rolled out a thematic strategy focused on biotech and healthcare, its second thematic PE fund. The strategy complements PAA’s existing thematic PE fund dedicated to technology, which has been closed at a hard cap of US$350 million in September 2021.
To create a diversified portfolio of private health care companies, the second PE thematic strategy will target high conviction investments in five key segments: therapeutics, diagnostics, digital health, medical technology, and health care and services providers. It will select top-tier life science and healthcare PE and venture capital fund managers and will invest a large proportion of the available capital directly and through co-investments.
Yeo said PAA is considering launching an environmental solutions strategy in 2H22. “The key focus areas of this strategy will be: greenhouse gas reduction, sustainable consumer pollution control, the circular economy and enabling technologies,” she said.
In order to reach the goal of 100% ESG integration by the end of this year, Pictet will keep developing ESG solutions and processes on a structural basis, she said.
“But in order to navigate volatility in the short term, Pictet will — on a more tactical basis — innovate with solutions such as capital protected structures,” Yeo explained. “We will manage volatility and focus on quality.”
