Asset managers need no reminding that the world in 2019 is a turbulent place. But how do they navigate the turbulence caused by major global currents – trade tensions, populism, climate change – and still create growth for investors?
That was the subject of a series of panels on Day Two of the Main Conference at FundForum International in Copenhagen on 26th June 2019.
Here are some of the key questions leading decision makers in the financial sector are asking:
What should we expect in terms of monetary policy?
Central bankers came under fire from many sides, with descriptions of policies ranging from the tactful “too conservative” to the blunter “disastrous”.
The US Federal Reserve is predicted to cut 100 basis point cut within the next 12 months – something never seen outside of a recession. Although the need to support growth was recognised, there is a concern that by extending the recovery, central banks are increasing the risk that the eventual downturn will be more severe.
As the Fed comes under unprecedented political pressure, there have been questions over its continued independence. As someone who previously worked there, Rochelle Antoniewicz, Senior Director, Industry and Financial Analysis, ICI Global, was able to reassure the panel that there was no danger of decisions being influenced by political concerns.
Are we already seeing the negative effects of a trade war?
Consumer confidence is being badly hit by tensions over trade.
One significant effect of tariffs is the shift in production to other parts of Asia away from China. Countries like Vietnam are benefiting as Chinese companies move their assembly lines to avoid tariffs, bringing significant investment in local infrastructure. The cost is ultimately being paid by the US consumer – as the US deficit with China has fallen, the deficit with the rest of Asia and Mexico has risen.
John Emerson, former US ambassador to Germany, now a senior executive at Capital Group International, pointed out that a trade deal with China was one of President Donald Trump’s key deliverables. He believes there is a reasonable chance that a trade deal of some kind could be struck before the end of the year to fit with the presidential re-election cycle. If so, then Europe might be the next target in US sights.
Where do investors go until the storm blows over?
Although growth in Asia has slowed, it is still significantly higher than in the US and Europe. Robert Horrocks, CIO, Matthews Asia believes investors who are prepared to hold for long term gains can find overlooked opportunities in “steady Eddie” companies in Asia that are servicing growing local markets. If investors can bear the emotional cost of sitting through some short-term turbulence, their patience will be rewarded.
Is higher volatility the new normal?
A lot of short-term volatility is being driven by factors such as instant AI responses to news or tweets, which create feedback loops.
However, Stuart Thomson, Senior Strategist, Manulife Investment Management, warned that an excess of liquidity is also driving volatile markets. This excess isn’t being soaked up by the major investment banks and is likely to affect volatility for some time.
How do you assess the impact of climate change on companies?
There is a consensus that considering how a company will be affected by climate change is now an integral part of assessing its long-term viability.
Fiona Frick, Group CEO, Unigestion, argued that climate risks needs to be considered beyond the lens of ESG. A systemic shift in society is likely to make some of the activities we invest in today intolerable. As people and societies adapt, it is essential to look at how companies are evolving their business models to the new realities.
Where are the big opportunities in China?
Despite trade tensions, the trend towards greater openness in China in financial services is continuing to gather pace. Sherry Madera, Chief Industry and Government Affairs Officer at Refinitiv, pointed to the opening of the London-Shanghai Stock Connect this week as an example of that trend.
Linda Li, Managing Partner at Vickers Venture Partners, highlighted the enormous growth of the middle class in China. While overall GDP per capita growth has been getting the attention, income growth in the middle classes has been soaring at 20% a year. Given that GDP per capita is still only a quarter of that of the UK, and a sixth that of the US, there is still an enormous potential for further growth.
The importance of local knowledge was stressed – working with Chinese asset managers and investing in strong and innovative Chinese brands that have very little name recognition in the rest if the world.
Is now the time for active investment in China?
The consensus is that active investment is much more desirable than passive investment in China now, although passive investment is better than none at all.
Managers who are sitting on the side-lines waiting for more clarity were warned that if they aren’t establishing a presence right now, building relationships with regulators and getting their face known, then there is a high risk they will be shut out when things really take off.
What other opportunities are attractive in Asia?
Chinas belt and road initiative is spreading investment and infrastructure far beyond its borders. Vietnam, Bangladesh and Indonesia were all named as areas likely to experience significant growth as result.
Can ESG investments help rebuild public trust?
One of the responses to the populist backlash against globalisation and the financial sector has been the acknowledgement that people want investments channelled towards environmental, social and governance goals.
Ileana Sodani, Managing Director at BNY Mellon, pointed out that ethical investing has grown by 34% since 2016. A focus on the values held by the end investor, and delivering returns through sustainable investing, can restore public trust in institutions and the sector as a whole.
Greater transparency and more explanation about what CSR policies are achieving will help that process. The asset management industry will also need to look more closely at itself – there is still a disconnect between what it professes, and how its actions appears to the public, whether that is in executive pay or representation of women on boards.
How much should investors drive ESG policies in the companies they invest in?
Stakeholders are demanding that the companies they invest in are actively forced to live up to their ESG goals. Jan Rasmussen, Head of ESG at PensionDanmark, believes there is a growing understanding that there is no trade-off between doing good, and doing well financially.
Investor coalitions, such as Climate Action 100+, are a way of exerting significant power over the policies of large multinationals. This isn’t being done just to be virtuous – there is a financial risk to your investment if some big companies don’t start behaving better than they do today.
