As disruption factors into investment decisions in this post-election period, Hans-Jörg Naumer reminds us of the "creative power of destruction." This is precisely the environment where active investors can apply their skills and sort out the winners.
Highlights from Hong Kong
The highlights from our recent Investment Forum in Hong Kong included not just our outlook on geopolitics, but also the impact of technological disruption. Both will continue to occupy the capital markets for quite some time to come, a fact of which we were reminded, not least, by the first political steps taken by the new US president.
Donald Trump has raised doubts not just about the entire Western alliance policy, but about globalization in general—and with it, the mechanism providing competition and comparative locational advantages that constitutes a win-win situation for all stakeholders. This is about much more than China, by the way, which also featured into our Investment Forum agenda. Our discussion on how China's capital markets are increasingly opening up was fascinating.
Now that the exuberant post-election market optimism is beginning to fade, reality is reasserting itself
Following a phase of almost exuberant optimism while waiting for Trump's fiscal-policy measures, reality is now reasserting itself. Meanwhile, geopolitics remain on the agenda as we wait for further details on Brexit, parliamentary elections in the Netherlands (in March) and presidential elections in France (in April).
The case for riskier asset classes
The only constant among all these variables seems to be global monetary policy, although just how immutable it ultimately proves to be remains to be seen. Trump's criticism of US Federal Reserve Chair Janet Yellen's policy makes one wonder whether the interest-rate curve might not turn out to be steeper than expected. There is, however, no denying that anyone wanting a weaker US dollar is not going to want a more restrictive monetary policy.
By contrast, European Central Bank President Mario Draghi is facing rising inflation rates in the euro zone, which makes it increasingly unlikely there will be an extension beyond December 2017 of his bond purchase program in its current form. Nevertheless, the major central banks are persisting with their expansionary monetary policies, and the phase of low/negative interest rates cannot be expected to end anytime soon.
On the upside, economic indicators in virtually all the key regions have been painting an increasingly friendly picture in recent weeks.
Active stockpicking is needed to filter out the winners of technological change
Active management is the order of the day if disruption is to evolve into Joseph Schumpeter's idea of the creative power of destruction: Active stockpicking is needed to filter out the winners of technological change, and active selection of investment segments will enable investors to take advantage of market volatility. Above and beyond any disruption, monetary policy, economic development and corporate earnings should favor riskier asset classes.
Regulators and policymakers in China have been enticing foreign investors with easier access to its bond markets – and our Asia-Pacific Fixed-Income CIO David Tan says it's working. Of particular interest are green bonds.
The fast growth and development of China's bond market is consistent with its government's ongoing efforts to allow easier access for foreign investors. As regulators and policymakers open up China's capital accounts, the investor base grows; this, in turn, means more onshore corporations are encouraged to issue bonds, which provides investors with a wider selection of credit issues.
China has been opening up its bond markets to foreigners, encouraging more onshore companies to issue bonds and providing a wider selection of credits
Not all of these bonds are without problems, of course, but even though the number of defaults has increased since 2014, the government has managed to contain systemic risks. In fact, defaults can be seen as a welcome part of China's bond-market development, since they help improve capital allocations and reduce moral hazard over the long term. Nevertheless, we would still like to see China implement a proper and proven default-resolution process to allow the restructuring of stressed credits, rather than rely on liquidity injections.
Another important development in China's fixed-income marketplace is the fact that China has become the third-largest issuer of green bonds – an area that we expect will continue to grow given China's many critical environmental projects.
As foreign access to the onshore bond market opens up, China's inclusion in global bond indexes becomes increasingly more viable, particularly in global emerging-market debt indexes. This should further boost the demand for China's bonds, particularly for investors seeking more attractive yield potential and diversification opportunities.