Following peaks in policy support and growth, the market is transitioning into a mid-cycle environment where increased volatility and stretched valuations can be expected. Against this backdrop, investors should think about gaining exposure to alternative investments to offset the volatility, says James Cheo, Southeast Asia CIO of HSBC Private Banking and Wealth Management.
“In this scenario, investors should have a bias for quality companies as returns are harder to come by. They should also adopt a more resilient, diversified portfolio which includes alternative investments such as private equity, private credits or hedge funds which can help to offset any volatility that would rise in the months ahead,” says Cheo.
The alternative investment market in Asia is growing exponentially. According to the “Alternative Assets in Asia-Pacific” report published by Preqin in June, private capital assets under management (AUM) are on course to reach US$6 trillion ($8.2 trillion) by 2025.
As demand remains robust, private capital will be playing an increasing role in asset allocations across the region. Asia Pacific-focused private capital AUM has expanded almost six-fold over the past decade, reaching US$1.71 trillion in September 2020.
In private equity specifically, dealmaking continued to be robust despite last year’s tough landscape for fund-raising and exits due to the pandemic constraints. A report released by Bain & Co on March 25 found that Asia Pacific’s private equity AUM rose to 28% of the global total. Returns remained strong, outperforming the region’s public markets by at least 3 percentage points across five-, 10- and 20-year horizons.
Cheo reminds investors that the current mid-cycle expansion could last for a prolonged period. Investors should also expect uneven recovery, as economies reopen at different timelines. “The US, for example, has seen encouraging economic recovery following its reopening. Europe is also presenting pockets of opportunities, as the reopening gains momentum. We might see some outperformance in Europe in the next quarter or so,” he says.
In Southeast Asia, Cheo thinks Singapore is a regional standout, having introduced effective policies to manage the Covid-19 pandemic. He favours the financial, industrial and property sectors, as well as the Singapore REITs.
Outside of Singapore, Cheo says HSBC is still monitoring the pandemic situation, as many countries are still grappling with the virus. “The virus transmutations have become an unpredictable risk factor that could affect the current mid-cycle recovery. Across Asia, the outbreaks of the Delta variant have caused economic recoveries to lose momentum, further amplified by the poor vaccination programmes in certain countries within the region,” he says.
Investors should also be wary of the risks posed by the volatility associated with the US Federal Reserve’s (Fed) tapering if it was done much faster than anticipated, says Cheo. In late September, the Fed said it will likely begin reducing its monthly bond purchases as soon as November, and signalled that interest rate increases may follow more quickly than expected amid risks of a lengthier-than-expected jump in inflation. Fed chairman Jerome Powell said the US central bank could conclude its tapering process around the middle of next year, as long as the recovery remains on track.
Sustainability revolution
As the end of the year approaches, HSBC is keeping its preference for equities, says Cheo. However, he adds that there are selective opportunities in the Asian credit space such as quality property developers that could give a solid yield pick-up.
HSBC also favours real estate, which it participates in various ways including through public equity with a mild overweight for real estate in the US and Asia, as well as within the private markets space.
Cheo explains that the pandemic has led to some interesting distressed assets, which parties such as private equity managers could be able to sniff out and purchase at a discount.
“These deals could be commercial properties, hotels, or warehouses that are badly hit by the pandemic. These properties can actually be reconfigured and optimised for a post-pandemic world, given that how we use office, retail and hotel spaces would be different. I think there are very interesting opportunities in investing alongside private equity managers that are able to add value to the real estate that would be suitable for life after Covid-19,” says Cheo.
In an effort to replicate the Global Financial Crisis playbook, investors are anticipating a significant amount of stressed or distressed assets to surface in 2021 and are preparing to deploy capital accordingly. According to PwC’s “Emerging Trends in Real Estate Asia Pacific 2021” report, even Japan — where transactions and valuations have remained strong — may see some pressured sales.
However, the report notes that government funding supporting local economies had put commercial real estate transactions on hold, as asset owners have yet to feel the pressure to sell. One brokerage analyst quoted in the report suggested that transaction volumes may bounce back in the latter half of 2021, when more properties would be put to market with a price adjustment.
Aside from this, Cheo says the firm sees opportunities in participating in the sustainability trends. In November, the UN Climate Change Conference of the Parties will take place, where more than 190 world leaders are expected to engage alongside government representatives and business leaders. This will lead to a greater discussion on sustainability, which could point to some interesting investment opportunities, says Cheo.
“Thanks to the heightened awareness regarding the importance of sustainability, governments, corporates and other parties are putting a concerted effort to manage the temperature increase,” says Cheo.
He adds: “This has created interesting opportunities for investments involving carbon capture technology, climate adaptation, energy transition as well as smart building technologies. These are the broad opportunities that, I think, would become very pertinent in the years to come that investors can participate in.”
Photo: HSBC
