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