Northern Trust "okay" with slower China growth

While China’s slowing growth has sparked debate about how low it will go, the quality of that growth is improving, said Wayne Bowers, chief executive of Northern Trust Asset Management for Europe the Middle East and Africa, and Asia Pacific.

“We are okay with slower expansion – 6.25%-6.5% – if that means cleaner and greener growth,” he told AsianInvestor on a recent trip to Hong Kong.

The country’s drive to reduce corruption and control emissions may cap GDP expansion, but it is also resulting in more sustainable, entrenched growth, Bowers added.

In fact others, such as executives from Schroder Investment Management, have suggested that the actual GDP growth figure is in fact close to zero, well below the target of 7.5% for this year.

“These are once-in-a-thousand-year events if you look at them statistically – therefore the recovery and repair cycle will take longer,” he said.

He cautioned that developed world growth will be sub-par, between 1.75%-2.25%, over the next 100 months.

While Bowers said he was surprised at the loss of investor confidence in Asia when tapering was announced, he saw falling commodity prices as a boon to the region’s economies.

Countries that are reliant on exports and have a strong labour force and developed manufacturing capabilities will see margins supported when they sell outside the region, he noted.

Though opinion is divided on the effect of a strengthening dollar on emerging Asian economies, Bowers argued that if valuations were to become extreme in developed markets, portfolio rotation into EMs would follow.

As the dollar strengthens, EM equity becomes relatively even cheaper and US equity more expensive, he added.

Meanwhile, in Asia, Northern Trust has seen sovereign wealth funds grow more interested in investments with environmental, social and governance (ESG) components, said Bo Kratz, the firm’s Asia-Pacific head.

“There’s been no shift in asset pools, but there is an awareness that a greater adoption of ESG investing will happen,” he added.

While Kratz admitted that such ESG screens might not add to returns, as long as they do not dent performance, he argued, they have a role to play in portfolio risk management.

“Not investing in companies that pollute, have poor social policies or sub-standard governance enhances risk management,” he said.

Kratz forecasts that assets will begin to be transferred to ESG-factor investments in the next one to three years.

Northern Trust’s strategy in Asia had been to focus on top-tier institutions. It is now also targeting investors like China’s domestic insurers.

The China Insurance Regulatory Commission moved to widen their investment scope, starting in October 2012. It has allowed insurers to invest in start-ups, and increased their allocation thresholds in stocks, direct property and wealth management/credit products to 30% of assets. It also raised the permitted overseas allocation from 5% to 15%.

But Chinese insurers feel hampered from investing overseas by internal incapability, fear of failure politically and limited opportunities in slow-growing developed markets, an AsianInvestor forum in September heard.

“They are still finding their way; it isn’t going to happen overnight,” said Kratz.