Mr. Keisuke Tsumoto reports
MANULIFE INVESTMENT MANAGEMENT'S GLOBAL INTELLIGENCE REPORT OUTLINES POTENTIAL RISKS AND OPPORTUNITIES OVER THE NEXT 12 MONTHS, AND BEYOND
Manulife Financial Corp.'s Manulife Investment Management has released its biannual global intelligence report, a firmwide outlook highlighting notable perspectives from its private and public markets investment teams. In the new report, Manulife Investment Management draws attention to Asia and believes the region remains attractive, particularly within emerging markets, amid the economic slowdown that is expected to continue and hit a trough later this year, and likely followed by a gradual recovery.
The report also reviews the negative-yielding debt landscape in the investable fixed-income market in detail and asserts that 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.
Asia remains attractive amid the slowdown with the prospect of a gradual recovery
According to Sue Trinh, managing director of global macro strategy at Manulife Investment Management, Asia's expected growth rate of 5.1 per cent (1) in 2020 continues to incite envy in the developed world. Asia also occupies the quality end of the emerging-market universe, making it more appealing to investors, however it is not immune to the global economic slowdown.
"Asia remains an attractive region, but its economic downturn has yet to hit a bottom," said Ms. Trinh. "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."
It takes more to generate positive returns in the era of negative-yielding debt
Negative-yielding debt represents a sea of change in the investable fixed-income market, creating undesirable knock-on effects for investors, banks and policymakers alike. "We have now officially entered an alternate fixed-income reality," said John F. Addeo, CFA, global chief investment officer of fixed income at Manulife Investment Management. "The incapability of traditional monetary policy, including near-zero rates, in stimulating economic growth is the primary driver for negative yields, in our view."
(1) "Regional Economic Outlook: Stunted by Uncertainty," IMF, Oct. 22, 2019.
Beyond policy rates, continuing 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 per cent 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 per cent was negative yielding (2). Investors should expect low to negative rates to persist for some time, though," continued Mr. 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."
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. Finally, 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.
Strong ESG opportunities for active Asia fixed-income managers
As environmental, social and governance (ESG) trends are changing companies' business models and regulators are pushing investors to think through issues such as the impact climate risk has on their portfolios, bondholders are becoming more vigilant in accurately measuring and managing these implications.
"Market interest in sustainable investment in Asia is rapidly growing," said Keisuke Tsumoto, head of fixed income, Japan, Manulife Investment Management. "In Japan alone, assets owned in sustainable investment strategies quadrupled between 2016 and 2018, making the country the world's third-largest sustainable investing markets (3)."
However, despite the improvement in corporate disclosure on ESG issues in Asia, datasets remain incomplete and inconsistent. This, in turn, presents a broad opportunity for actively managed sustainable Asian fixed-income strategies.
"Against a backdrop of sometimes conflicting and evolving paradigms for issuing and investing sustainably in Asian assets, stakeholders must conduct careful and collaborative due diligence to avoid muddled results," added Murray Collis, head of fixed income, Singapore, Manulife Investment Management. "We believe active research and engagement are vital to identifying true areas of ESG risk and opportunity, developing cogent strategies for mitigating or capturing these factors, and strategically integrating these issues into investor portfolios."
Other key takeaways from the global intelligence report
"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. This report looks at five ways in which private equity investing can continue to play a positive role in the years ahead.
"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. This report gives investors a clearer picture of where business value can be generated.
"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 per cent from the prior year (4). This report spells out six outsourcing considerations for pension plan sponsors.
(2) Bloomberg, November, 2019.
(3) Global Sustainable Investment Alliance, 2018 global sustainable investment review.
(4) "U.S. Outsourced CIO Function 2018: Increasing Competition and Service Customization," Cerulli, 2018.
About Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial. The company draws on more than 150 years of financial stewardship to partner with clients across its institutional, retail and retirement businesses globally. Its specialist approach to money management includes the highly differentiated strategies of its fixed income, specialized equity, multiasset solutions and private markets teams -- along with access to specialized, unaffiliated asset managers from around the world through its multimanager model.
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