APG Asia CEO: the age of free money drawing to a close
Against the backdrop of sticky inflation, rising rates and geopolitical conflict, bond and equity markets have experienced significant turmoil, and fears of a looming recession are growing among many investors and analysts.
This new market reality need not be all doom and gloom, and actually provides large asset owners with new opportunities, according to Thijs Aaten, CEO of APG Asset Management Asia.
“If you look back to the last five years, 10-year government bonds were trading at 0% interest rates, equities were trading at very high earnings multiples and central banks were flushing the economy with liquidity,” Aaten explained at AsianInvestor’s 18th Asian Investment Summit on May 18.
APG
As one of Europe’s largest asset owners, what the €547 billion ($577 billion) Dutch pension fund investor has is capital. However, in the free money environment of recent years, no one was waiting for that capital which meant that expected returns were quite low, he said.
“Asset owner capital is in demand again, which implies that forward-looking returns are projected to be a lot better than a couple of years ago. In that sense, higher interest rates also imply higher expected returns, as do lower multiples for equities,” said Aaten
Amid the higher interest rate environment, APG is making preparations to seize investment opportunities that might present themselves.
“Volatility, especially, might bring very interesting opportunities if you're holding capital, and if you're able to invest. So it's not all doom and gloom, and actually, we're a bit more optimistic than a couple of years ago.”
BEING NIMBLE
The demand for capital and rising volatility does create a unique opportunity for advanced asset owners who have the capabilities to be nimble across a number of asset class platforms, according to Andrew Hendry, CEO Singapore and head of distribution Asia at Janus Henderson Investors.
Janus Henderson Investors
“However, many second-tier pension funds, endowments and even some of the government entities around Asia Pacific will face a lot of friction when it comes to the flexibility of their tactical asset allocation. We saw that totally freeze up last year.” Hendry told AsianInvestor’s audience.
In the current climate, if it takes an institution three-to-six months to get an investment decision through all relevant shareholders, governing bodies and regulators “you will just miss the opportunity", he said.
“Unfortunately, because of the stellar returns in stock markets in recent years, and the almost zero returns in the government bond area—investors became quite complacent about the need for nimbleness of decision making and having multiple sources of return,” said Hendry.
He said long protective strategies such as private markets and hedge funds would be necessary going forward.
“I think those folks who haven't addressed that yet—and we know this for a fact because we saw it last year—they’re going to be struggling over the next few years to benefit from the opportunities coming up.”
OPPORTUNITIES AND RISKS
Insurance investors typically tend to be risk- and long term-focused but amid the heightened volatility in the market, William Chan, CIO of HSBC Life, told AsianInvestor’s panel that he can see both risks and opportunities.
HSBC Life
“High interest rates are actually good for us as our staple investment is long-dated bonds—to be able to lock in high levels of interest rate for these 10-year, 20-year and 30-year bonds is a much better investment than before, when the rates were low,” said Chan.
However, many sectors of the economy have become so used to the low interest rate environment that the very sudden, sharp and significant extent of the rate rise the markets have experienced is presenting a huge challenge to many parts of the financial system, he said.
“The mini banking crisis that we have seen could be interpreted as potentially the first shoe to drop, and there is growing speculation that the commercial real estate sector has more bad news to come, and other potential stressors might emerge,” said Chan.
“Market stress is not necessarily a bad thing, if you have correctly positioned yourself and have good timing you can find benefits and opportunities. But if you are wrong-footed - and you get yourself overly exposed too early - you are going to have a terrible time.”