SSGA’s Hon Cheung takes global role, tips huge flows from FX reserves

Of an estimated $2.5 trillion of surplus sovereign reserves in Asia Pacific, as much as $1.5 trillion could be invested in equities, said the new chief investment strategist for State Street Global Advisors’ official institutions group (OIG).

Hon Cheung also sees growing use of exchange-traded funds by sovereign funds and even by less sophisticated central banks, as reserve managers broaden their range of investments.

He was previously head of Asia Pacific for the OIG, which covers central banks, sovereign wealth funds and other state asset owners, and will retain most of those responsibilities.

Cheung’s new post, which he took up last month, will allow him to focus more on advising public entities on investment solutions and strategies, AsianInvestor can reveal. This is something that he had already been doing for some time, but with the position now formalised, he will be doing less administrative work and more travelling.

“I will now have a lot more face time with clients within and outside Asia,” Cheung (pictured left) told AsianInvestor. “I intend to visit most of the major regions – across Europe, the Middle East and Africa, North and South America and of course Asia Pacific – at least twice a year.”

Moreover, SSGA has expanded its OIG team in the past few years from three to seven globally and is looking to increase headcount further. Cheung said this growth had reinforced the need for a more dedicated focus on investment solutions advice.

He continues to report to Louis de Montpellier, London-based global head of OIG, but now also reports to Lori Heinel, SSGA’s global head of investment strategy in Boston.

Surfeit of reserves

The expansion of the OIG team reflects the swelling of sovereign assets globally and particularly in Asia. Global foreign reserves stand at around $11 trillion globally, noted Cheung, up from $5.5 trillion 10 years ago. Asia Pacific accounts for $6 trillion of the total (see table below), and $2.5 trillion of that is surplus that could be invested, estimates SSGA.

Given the general rule that SWFs and endowments have 40-60% in stocks, said Cheung, the equity investment capacity of Asia’s surplus foreign reserves could be as much as $1 trillion to $1.5 trillion. “I don’t think we’re anywhere near that,” he added, “but it does represent a significant opportunity set.

“With zero or even negative yields, the idea of moving some surplus reserves into higher-return assets, such as higher-yielding debt markets and equities, has become a lot more accepted in foreign reserve management circles.”

What’s more, bond market liquidity has shrunk substantially, he added. “You could now argue that equities represent a very important source of instant liquidity, though with higher volatility.”

Certainly, more central banks globally are looking at stocks and potentially at raising their equity exposure, said Elliot Hentov, London-based head of policy and research for the OIG at SSGA, which manages around 15% of its $2.4 trillion of AUM on behalf of official institutions.

Reserve managers are also being more active in fixed income, such as changing – whether shortening or lengthening – the duration of those portfolios and trading bonds more frequently, Hentov told AsianInvestor. At the more sophisticated end, they are going more into corporate and emerging-market debt, he added.

Cheung said reserve managers had also thought about reducing their reliance on using benchmarks for bonds and moving towards more of an unconstrained fixed income approach as a way to hedge against a rising yield environment, as is expected in the coming years.

Some of the larger and more sophisticated reserve entities are even looking at alternative assets, he added. If they are willing to take advantage of the illiquidity risk premium of private markets, said Cheung, they should not limit themselves to one part of it. “The anecdotal evidence suggests that OIs that are in alternatives also take that view.”

Official institutions’ concerns

So what are official institutions in general particularly worried about at present?

“If I had to rank concerns now,” said Cheung, “I would put geopolitical aspects right up there, particularly the US policy outlook as probably the number one concern for OIs, followed by the impending rising yield environment.”

That compares to a year ago, he noted, when their main concern would be how to manage the shift to normality in yields and the exit from various stimulus programmes out there.

“My sense when I have conversations with reserve managers is that they are realistic,” said Cheung. “They know they’re not going to get an immediate answer on these political uncertainties. They will likely wait for more evidence of what the final policy outcomes might look like before taking any significant asset allocation views.”