Rising rates? Keep your eyes on the prize, say regional asset owners

Mar 27, 2022

Rates are headed north, but other factors - such as organisational mandates and sustainability - need to be considered, say top investment executives from HSBC Life and the Indonesian Investment Authority.

Rising rates? Keep your eyes on the prize, say regional asset owners

Rising interest rates might be top of mind with investors, but other long-term trends and priorities such as responsible investing and nation-building are also influencing institutional investor allocation strategies.

Most important, however, is that investors have a clear plan of action with sufficient flexibility to adjust to risks arising from sudden financial shocks leaving scope to take take advantage of opportunities, said representatives of three major institutional investors who spoke at the AsianInvestor’s Thematic Investing Forum on March 24.

RATE RISK

William Chan

HSBC Life

“One factor, among all, matters more for financial markets trajectory and that factor is invariably interest rates cycle,” said William Chan, chief investment officer of HSBC Life, the insurance arm of the bank.

While geopolitical events and regulatory news tend to be transient, interest rate cycles have a longer-lasting impact on the markets, he said.

“Right now, there is a congregation of bad news that has undermined investor confidence,” he said, referring to the Ukraine crisis, the Covid pandemic and inflationary pressures in the US and Europe.

There is also the looming threat of a recession in the US - judging from the flattening of the yield curve – if the Fed raises rates too aggressively plunging the economy into a slump, he said.

Yet, another risk from the series of rate hikes that the Fed has in store for this year is stagflation – a sharp economic slowdown combined with high inflation – which would be bad for stock markets, he said.

Although the US economy is not on the cusp of either a recession or stagflation, in his opinion, and the markets have not priced either scenario yet in their valuations, the situation is fast evolving and bears close monitoring.

As a strategic investor, he said his company took a long-term view of investments and minimises trading activities in and out of the market in response to short term volatility. Having said that, there was scope for tactical allocation in the more liquid asset class such as equities, he said.

“In terms of risk budgeting, we do not, strictly speaking, try to balance risk budget per se, rather we try to optimise the return on risk when we manage our investment portfolio,” he said.

"One of the ways to mitigate risk is to configure our portfolio investment in favour of assets that have lower risk charges – the minimum amount of capital required to be held against insurance risks - and reduce those with high-risk charges.” he said.

NATIONAL PRIORITIES

For Indonesia’s sovereign wealth fund, whose chief investment officer was also a speaker at the event, there were three main factors guiding its investment strategy: commercial returns; attracting foreign direct investment; and contributing to the country's economic and social development, said Stefanus Ade Hadiwidjaja of the Indonesian Investment Authority (INA).

Stefanus Ade Hadiwidjaja

INA

Among the thematic investments it has undertaken, which are also considered Indonesia’s top national priorities, have been transportation infrastructure such as toll roads, ports and cargo terminals.

Another investment theme that is set to receive more attention from INA is digital infrastructure, namely telecommunications towers, optic fibre, data centres, and broadband services.

“We want to make sure the growth of digitalisation in Indonesia is supported by strong infrastructure,” he said, adding INA could also invest in e-commerce and set up a digital growth equity fund in future.

With the Covid pandemic still fresh in the minds of Indonesians the area of social infrastructure and healthcare security - namely hospitals and pharmaceutical companies - stood out as a key sector that is expected to be on INA’s agenda.

INA will also focus on green investing.

“You’re talking about renewable energy, waste management and so on,” he said.

As a sovereign wealth fund, INA adopts a long-term investment strategy, which gives it also the flexibility to adjust its investment horizon.

“We can stay until the end of the concession, say 25 years or 40 years. We can also be opportunistic by investing and exiting like private equity in 5 years to 7 years,” he said.

SUSTAINABLE ASSETS

Meanwhile, for Sequis Life, one of Indonesia’s top life and health insurers with total assets of Rp18.4 trillion ($1.28 billion), its investment strategy has been gravitating towards sustainable assets.

Muhamad Johan Sidik

Sequis Life

“For us, institutional investors, the megatrend means ESG (environmental, social and governance),” said its chief investment officer Muhamad Umar Johan Sidik.

“I would say adoption rates for ESG is promising since 20% of domestic listed companies have already adopted ESG and submitted required sustainable finance report,” he said.

He said Sequis’ portfolio, which has traditionally been dominated by investments in transportation infrastructure, has diversified to include digital infrastructure – such as tech startups and unicorns – and ESG assets, which include the electric vehicle and battery industry and tidal energy projects.

In terms of managing risks, he said it was important for the company to maintain a balance.

“As practitioners, we just have to be as comfortable as possible with all possible risk scenarios and review the optimal structure for our portfolio that’s relatively sustainable in the long term.”