Why Asia continues to 'incite envy in developed world'

Region remains attractive for investors, says Manulife report, which also recommends strategies to deal with negative-yielding debt

Why Asia continues to 'incite envy in developed world'

Asia remains an attractive region for investors amid the global economic slowdown, according to a new report by Manulife Investment Management.

The firm’s Global Intelligence paper outlines potential risks and opportunities over the next 12 months and beyond from the perspective of its private and public markets investment teams.

The report states that Asia’s expected growth rate of 5.1% in 2020 “continues to incite envy in the developed world”, occupying the quality end of the emerging-market universe.

However, there was caution too, with Sue Trinh, managing director of global macro strategy, pointing out that despite the region’s appeal to investors, it is not immune to the global economic slowdown, which is expected to hit a trough later this year before likely staging a gradual recovery.

She said: “Asia remains an attractive region, but its economic downturn has yet to hit a bottom. The stubbornly low economic growth and subdued inflation leave markets vulnerable to a reversal in sentiment, and we expect a prolonged bottoming-out process with only a gradual recovery.

“As the world’s growth engine, the path to Asia’s economic recovery has enormous relevance to investors, but recovery is constrained by numerous headwinds to growth and governments’ ability to continue with monetary policy.”

The report also reviews the negative-yielding debt landscape in the investable fixed-income market and asserts that it takes more to generate positive returns.

It states asset managers need to consider certain strategies, including: taking advantage of their global footprint, adopting a nimble approach, and demonstrating acumen across a wide range of less traditional and fundamentally active strategies to help generate positive returns.

John F. Addeo, global CIO of fixed income, said that negative yielding debt represents a sea change in the fixed-income market.

He said: “We have now officially entered an alternate fixed-income reality. The incapability of traditional monetary policy, including near-zero rates, in stimulating economic growth is the primary driver for negative yields, in our view.”

Beyond policy rates, ongoing quantitative easing by central banks is driving the prices of longer-dated bonds and pushing down yields. Moreover, investors’ demand for income is bidding up bond prices as well.

“A stunning 22% of the Bloomberg Barclays Global Aggregate Bond Index carried a negative yield in November. This was led by the index’s sovereign allocation, of which 31% was negative yielding. Investors should expect low-to-negative rates to persist for some time, though,” added Addeo.

The lower-for-longer scenario may persist, as inflation rates remain stubbornly below policy targets across many developed markets, with massive debt burdens, globalization, aging demographics, and technology-related price deflation all applying downward pressure. Fixed-income managers will require more tools at their disposal in generating income.”

The report explained that a global research footprint will be crucial in finding opportunities in the era of negative yields. A global network with local teams in market, capturing development first-hand and in real time, will lead to better decision-making and more effective risk management.

Also, a capital structure agnostic view, an openness to high yield underpinned by strong fundamental research capabilities, and a readiness to take advantage of emerging-market debts and preferred securities are possible ways of finding income.

Other key takeaways from the Global Intelligence report include:

“Pursuing alpha: private equity opportunities in the decade ahead” — private equity capital has become a more prominent source for financing global commercial enterprises, as returns on that capital are less tied to beta than those from public markets.

“Finding value in a late-cycle economy” — with markets now in late-cycle territory, stock price volatility has become a greater challenge for investors. But by solely focusing on short-term stock price movements, investors risk missing out on longer-term value creation opportunities.

“The OCIO checklist manifesto” — the outsourced chief investment officer (OCIO) fiduciary model is gaining traction among pension plan sponsors and other institutional investors, as worldwide OCIO assets under management grew to over $1.5 trillion in 2017, up more than 14% from the prior year.