Alvin Tay
Alvin Tay
Chief Portfolio Advisor, Asia

The deglobaliation trend, heightened by the Covid-19 pandemic and amplified further by Russia’s invasion of Ukraine, has disrupted supply chains, caused inflation rates to skyrocket and prompted quantitative tightening by Central Banks.

 

At the same time, a global transition to greener energy and a move to a net-zero carbon economy in a bid to tackle climate change is creating significant shifts in the world economy.

 

With so many challenges facing today’s asset owners, it was a pleasure to sit alongside leading investors at Mercer’s Global Investment Forum to hear how they are adapting their portfolios to protect returns and deliver growth.

 

We heard from Bernard Wee, Assistant Managing Director of the Markets and Investment Group at the Monetary Authority of Singapore; Wey Fook Hou, Chief Investment Officer, Consumer Banking & Wealth Management at DBS Bank in Asia; and Ann Leepile, Chief Executive Officer at Alexander Forbes Investments in South Africa.

 

Rising inflation

 

The panellists all agreed that inflation is a corrosive force on their portfolios, with Wee noting there had been nowhere to hide in the short-term, with even traditional sources of inflation protection like inflation-linked bonds and commodities being challenged in the recent period. With commodities, if the intention were to protect against inflation, Wee noted the need to be more deliberate in sector selection, given the variety of return drivers for different commodity sectors.

 

Hou said that conversations with clients had been “very challenging” over the past eight months, but he had been advising them to stay the course with their investment strategy, arguing that forward looking prospects for simple 60/40 equity/bond portfolios have improved with more reasonable equity valuations and higher bond yields.

 

Leepile noted that Alexander Forbes had responded to the tailwinds that strong commodity prices were expected to provide for the South African economy by tilting client portfolios away from global equities and towards South African equities. She added that they had “derisked some of [their] portfolios to protect capital and put a lot more allocation into private markets, particularly in terms of infrastructure.”

 

We similarly noted the inflation-indexed pricing of some infrastructure assets as being beneficial to portfolios in an environment of rising inflation.

 

Economic decoupling and geopolitical risk

 

Investors are also increasingly paying attention to the longer-term impact of deglobalisation and geopolitical risks on their portfolios .

 

In relation to the trend of Western nations moving production back onshore in order to reduce reliance on other countries, Hou suggested that this will result in a major increase in capex expenditure as corporates seek to build new manufacturing facilities in their home countries.

 

Wee indicated that while he continued to believe in the secular growth story of emerging economies, the deglobalisation trend is likely to slow down the pace of convergence with developed economies. As economies increasingly look inwards and focused on self-sufficiency, Wee also indicated that there is an increasing risk of countries having to bear greater debt burdens going forward, which could be more challenging for emerging economies.

 

MercerInsight® Community

Connecting investors for richer insights.


Join our community for complimentary access to Mercer's latest insights and those of the broader asset management industry. Everything you need in one place to help you make informed decisions about your investments.

 

 

While acknowledging the deglobalisation trend, Leepile said South Africa was unifying with the rest of the African continent through the Africa Free Trade agreement, which she said made it “a lot easier to engage with the East and the West”.

 

Given that the impact of deglobalisation and that geopolitical considerations could vary significantly from one country to another, there was agreement among the panellists that the traditional construct of allocating to developed vs emerging markets would not be sufficient to reflect the risks and opportunities arising from such variances, and there may be a need to adopt a more granular approach in determining country allocations going forward.

 

Climate change and sustainability

 

There is substantial global alignment on the need to address climate change risk, but there is still an enormous amount of work to do to align public and private sector investment with the objective of limiting global warming to 1.5C by 2050.

 

Wee drew similarities between carbon pricing policies and interest rate policies, arguing that a gradual raising of carbon prices by fiscal authorities – much like a gradual increase of interest rates to deal with inflationary conditions – would mean less volatility. But if governments were forced to hike carbon pricing more aggressively in response to slower than desired progress on climate objectives, then investors are in for a bumpy ride.

 

“That’s a factor that investors need to think about and understand the risks,” Wee said.

 

At DBS Bank, Hou said environmental, social and governance (ESG) factors are firmly integrated into investment strategy.

 

He said: “When the fundamentals and valuations are equal between two companies, but one has a higher a higher ESG rating, we will invest with that company.”

 

Panellists also discussed the dominance of environmental factors in ESG discussions, and Leepile called for a greater appreciation of the ‘S’ and the ‘G’.

 

“There are immediate crises in the world that also need addressing outside of climate. South Africa sits with a 34% unemployment rate, and we have a heavy resource-based economy. Should we opt to disinvest from a number of what you would call polluters in the world when that might increase the unemployment rate creating huge political instability and risks for us as a country?”

 

Instead Leepile favours impact investing which, she said, encourages companies to deliver the type of world in which “we all want to work and live”.


Important Notices

 

References to Mercer shall be construed to include Mercer LLC and/or its associated companies.

 

© 2022 Mercer LLC. All rights reserved.

 

This content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without Mercer's prior written permission.

 

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications.

 

This does not constitute an offer to purchase or sell any securities.

 

The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed.

 

For Mercer’s conflict of interest disclosures, contact your Mercer representative or view here.

 

This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Mercer provides recommendations based on the particular client's circumstances, investment objectives and needs. As such, investment results will vary and actual results may differ materially.

 

Information contained herein may have been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission or inaccuracy in the data supplied by any third party.

 

Funds of private capital funds are speculative and involve a high degree of risk. Private capital fund managers have total authority over the private capital funds. The use of a single advisor applying similar strategies could mean lack of diversification and, consequentially, higher risk. Funds of private capital funds are not liquid and require investors to commit to funding capital calls over a period of several years; any default on a capital call may result in substantial penalties and/or legal action. An investor could lose all or a substantial amount of his or her investment. There are restrictions on transferring interests in private capital funds. Funds of private capital funds’ fees and expenses may offset private capital funds’ profits. Funds of private capital funds are not required to provide periodic pricing or valuation information to investors. Funds of private capital funds may involve complex tax structures and delays in distributing important tax information. Funds of private capital funds are not subject to the same regulatory requirements as mutual funds. Fund offering may only be made through a Private Placement Memorandum (PPM).

 

Not all services mentioned are available in all jurisdictions. Please contact your Mercer representative for more information.

 

Investment management and advisory services for U.S. clients are provided by Mercer Investments LLC (Mercer Investments). Mercer Investments LLC is registered to do business as “Mercer Investment Advisers LLC” in the following states: Arizona, California, Florida, Illinois, Kentucky, New Jersey, North Carolina, Oklahoma, Pennsylvania, Texas, and West Virginia; as “Mercer Investments LLC (Delaware)” in Georgia; as “Mercer Investments LLC of Delaware” in Louisiana; and “Mercer Investments LLC, a limited liability company of Delaware” in Oregon. Mercer Investments LLC is a federally registered investment adviser under the Investment Advisers Act of 1940, as amended. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Mercer Investments’ Form ADV Part 2A & 2B can be obtained by written request directed to:  Compliance Department, Mercer Investments 99 High Street, Boston, MA 02110.

 

Certain regulated services in Europe are provided by Mercer Global Investments Europe Limited and Mercer Limited.

 

Mercer Global Investments Europe Limited and Mercer Limited are regulated by the Central Bank of Ireland under the European Union (Markets in Financial Instruments) Regulation 2017, as an investment firm. Registered officer: Charlotte House, Charlemont Street, Dublin 2, Ireland. Registered in Ireland No. 416688. Mercer Limited is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 984275. Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU.

 

Investment management services for Canadian investors are provided by Mercer Global Investments Canada Limited. Investment consulting services for Canadian investors are provided by Mercer (Canada) Limited.