A cocktail of geopolitical and macroeconomic factors is forcing investors to hit pause on their plans, and with US Treasury bills (T-bills) at above 5% yield, they are being “paid to wait”, says Simon England-Brammer, Nuveen’s head of Asia-Pacific and Middle East for its global client group.
“There’s lots of things taking place at the moment,” England-Brammer tells The Edge Singapore. “You’ve got the China-US trade tensions, Russia invading Ukraine, inflation being wherever it is at the moment, interest rates moving as quickly as they have to combat that — it’s just a cocktail that’s been put together, which is quite a unique scenario.”
The US six-month T-bill rate was 5.52% as at July 14. Investors are now “sitting back, perhaps pressing pause” in their strategic direction, adds England-Brammer, who is based in Hong Kong.
According to him, even insurers are looking at the hurdle rate on their liabilities, or the minimum rate of return on an investment that will offset costs, and thinking: “Well, I’m not taking any illiquidity risk; I’m not tying up the capital, I don’t need to make any very aggressive investment decisions. I can go into what is seen as a ‘safe investment’ in US T-bills and I’m still getting enough return to cover the objectives of that plan.”
According to the former Invesco managing director, investors are saying: “I’m not necessarily going to be paid to take the risk. I might as well just wait. Let’s see how things unfold through the second half of this year.”
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Nuveen’s third annual EQuilibrium survey, released in March, reveals that more than half (56%) of some 800 institutional investors consider the market environment to be unlike any they have seen in their careers.
A similar number (59%) are “actively rethinking, redefining or hitting the reset button on their portfolio strategies”, according to Nuveen, which boasts US$1.1 trillion ($1.5 trillion) in assets under management as at March 31.
Institutional asset owners are reframing the future and preparing their portfolios for a market regime that differs dramatically from recent decades, says Nuveen in the report’s preface. “These efforts are being driven by monumental shifts in monetary policy, rising geopolitical uncertainty, energy transition and many other forces disrupting the investment landscape.”
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When can we expect a return to form? England-Brammer suggests that 2H2023 “is going to be hugely important”.
My professional guesstimate would be that we are going to be looking at 1Q2024; that should give us [an] indication in terms of where things are likely to go.
Certain parts of public equities are now trading “healthy” price levels, he adds. “At the moment, it is probably fair to suggest that there has been momentum driving those markets. It’s probably fair to say that they will pull back in some way.”
Nuveen’s chief investment officer Saira Malik thinks earnings growth looks poised to decline for the third quarter in a row and may mark its biggest drop since 2Q2020.
In a July 10 report, Malik points to analysts trimming their 2Q2023 earnings estimates, allowing US-listed companies to deliver stronger-than-expected results. “We are cautious about the self-fulfilling optimism driven by these diminished expectations, seeking to balance equity allocations between areas of the market where we want to add beta and others that we believe can provide downside protection. Additionally, we’re mindful of mixed US economic data and the potential for two more rate hikes this year.”
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Green shoots come year-end?
More than half (58%) of the EQuilibrium survey respondents represent organisations with assets of more than US$10 billion, with a minimum asset level of US$500 million. These include corporate pensions (33%), public or governmental pensions (25%), insurance companies (24%), endowments and foundations (10%), sovereign wealth funds (4%), superannuation funds (3%) and central banks (1%).
The 800 institutions surveyed span North America (31%), Europe, the Middle East and Africa (46%) and Asia Pacific (24%); and gave their input in October and November 2022.
Across asset types and macro themes, the survey measured only investors’ intent. In reality, have they acted upon these plans?
The intention is “very much there”, says England-Brammer. “Have we actually seen money in motion to support that? We have, to a certain extent.”
He reiterates the appeal of risk-free US T-bills. “I think the market dynamics have perhaps slowed that desire.”
With the June 14 Fed pause and two hikes likely left in the year, could investors sing a different tune on risk-free rates come October, when the next EQuilibrium survey is conducted?
England-Brammer thinks the upcoming survey could reveal more of the same. “I think it’s going to look very similar in terms of what these institutions are looking for. Where do they want to allocate to as a strategic priority? I don’t think that’s going to change personally.”
From a tactical point of view, however, England-Brammer thinks the tail end of this year could see “a little more green shoots coming through”.
More investors will start going back towards real estate, real assets, bonds and agriculture in a more positive manner. I do think that the green shoots are still coming through in those areas. That’s where I would expect to see change.
A lesson in diversification
“Everything that didn’t work over the past 15 years are the things that I see institutions taking an interest in,” writes Nuveen’s head of multi-asset Nathan Shetty in the EQuilibrium report.
This does not mean investors are taking this time to experiment. Rather, these are driven by other factors, such as investors positioning themselves for themes like environmental, social and governance (ESG) and climate, says England-Brammer. “There is a significant desire to be diversified and correlated, particularly from the public markets… What that means is that when we start seeing asset classes, such as farmland, agriculture, timber; these have historically demonstrated as being uncorrelated to equity markets. They have a natural inflation cover embedded in the asset class themselves.”
These assets act as hedges because inflation most commonly leads to rising commodity prices on agricultural products coming from the farmland. The appreciating value of farmland also creates a secondary income stream that is realised when the property is sold.
Elsewhere, a “tremendous amount of money” has gone into public fixed income, but England-Brammer sees opportunity in private credit, specifically mid-market, senior structures “sitting across the US and European markets”.
We consider 2022, 2023 and 2024 good vintages for private credit.
England-Brammer notes “a little bit of slowing” into semi-liquid vehicles. “The conversations we’re having with many of the large private banks is that there is a bit more of a swing back to private, closed-end capabilities.”
This period has been a lesson on how institutions and the ultrahigh-net-worth think about their asset allocation, he adds, given “the way things have moved in 2023, and how quickly they moved in the first half of this year”.
“I don’t think there’s going to be an immediate return to how things work before,” says England-Brammer. “I’m hoping it will be a good education in terms of diversification, whether it’s geography, investment capabilities [or] asset classes, [on] the benefits and the need to have that diversification in place.”
Photos: Albert Chua/The Edge Singapore
