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Toward normalization – the uneven path to growth
July 2016 marked an inflection point from deflation to reflation. Bond yields started to rise on a brighter growth outlook. We expect global inflation, led by the US, to increase very gradually. In our view, the expected rise in US policy rates is likely to be the most modest and gradual normalization in the history of the Federal Reserve. However, the path to growth is likely to be uneven due to various risks, particularly the balancing act which will be necessary to exit successfully from ultra-accommodative monetary policy.
Against this backdrop, after a protracted period during which beta (the market) has dominated returns, we see a shift toward portfolio manager skills (alpha) playing a much greater role in generating returns. As rates go up, the pace of appreciation of equity markets slows. US equities in particular command rich valuation metrics and it is realistic to expect that over a 5 to 10 year forward view returns will be lower than those experienced over the past few years. In this phase of the cycle, every 50 basis points of alpha will be worth gold and the appetite for alpha-oriented strategies is likely to grow.
Opportunities in emerging markets
We see consumer spending, healthcare, real estate, and information technology as the key growth themes in emerging markets. However, the environment is dynamic. It is influenced by various diverging growth trends, and faces many political and economic challenges including industrialization and the digital revolution. We therefore believe that an active country, sector and security selection, based on exhaustive top-down and bottom-up research, is a prerequisite to add value to emerging markets portfolios.
China market outlook – China's mini-cyclical slowdown will have a global impact
China’s policymakers are highly resolved to keep monetary conditions in the country tight relative to the very loose policy conditions that were experienced from mid-2015 to the end of 2016. As a result, China is experiencing a mini-cyclical slowdown.
Our China market outlook offers an overview of China’s economic backdrop and assesses the implications of recent reform policies and policy action.
Chinese bonds – What's the big deal?
Following rapid growth in recent years, the Chinese bond market is currently the third largest in the world. We believe there's potential for the market to overtake Japan and become number two within the next five years, standing second only to the US.
We discuss the transformation in China's bond market and the implications for global investors as more and more Chinese entities start to raise capital in the onshore bond market.
Emerging Markets – An out of favor asset class gains momentum
Emerging market equities have been an unloved asset class in recent years. However, several important factors may bode well for their performance over the next few years:
- Improvement of key indicators such as economic growth, corporate earnings and profitability
- The potential for rising incomes and consumption growth
- Rapid adoption of technology/Internet helping to surpass traditional consumer channels
- Attractive valuations relative to developed market equities
Is it time to take a closer look?
Moving forward – Opportunities in emerging markets
After the great financial crisis of 2008-2009, emerging markets looked more attractive than developed markets due to their higher expected growth rates. As a matter of fact, they grew much stronger than developed markets until 2011, when the euphoria surrounding the emerging markets growth story started to settle and investors turned to developed markets once more.
Low yields have presented a significant challenge to investors for a number of years. We see a moderate US-led reflation which is slow and expect inflation and interest rates to reach levels well below the average of past recovery peaks. While global growth is likely to pick up, yields are still at low or negative levels and we expect them to stay low in Europe and Japan in the foreseeable future.
In our view, there are three paths which could offer potential returns to investors, while endeavoring to avoid assets with low yields and possibly negative returns: 1) adding to higher yielding bond strategies; 2) within equities, a focus on unconstrained strategies; 3) increasing exposure to alternative asset classes.
The Great Escape – Escaping the lower for longer environment
Since the Global Financial Crisis (GFC), developed economies have been stuck in a lower for longer environment – lower demand, lower profits growth, lower inflation and lower interest rates. With lower expected returns, companies have been discouraged from investing in their businesses, perpetuating the low growth environment in the process. The impact has been pervasive in the world of economics and markets, but also on the political and social landscape.
In the current low growth, low inflation, low yield environment, the concept of the equilibrium rate of interest is becoming increasingly important. We believe there has been a structural downward shift in the equilibrium rate. In this paper we assess the implications of that shift for investors.
Sustainable and impact investing
We believe that the integration of material sustainability criteria leads to better informed investment decisions through the identification of growth opportunities and the management of long term risks.
Stranded assets what lies beneath
As evidence of the impacts of climate change mount across the globe, including the warmest year on record to date, asset owners are increasingly asking: Should we continue to invest in fossil fuels? Many asset owners are considering the argument that fossil fuel reserves cannot be safely burned without triggering run-away global warming – the Stranded Assets hypothesis.
A revolution in equity investing – A deeper dive into nonfinancial data
Equity investing and security analysis are undergoing a paradigm shift toward a sharper focus on evaluating intangible assets. In parallel, sustainable investing is transforming from an investment approach heavily reliant on exclusionary screens and haunted by questions about underperformance, toward identifying outperforming companies using an extended mosaic of nonfinancial data. n this paper, we describe the emergence of a globally standardized, objective approach to holistic security analysis along two dimensions: analyzing valuations from financial data, and incorporating nonfinancial (sustainable) data.