Manulife Investment Management’s Global Intelligence report

Asia remains attractive amid the slowdown with the prospect of a gradual recovery

According to Sue Trinh, managing director of global macro strategy at Manulife Investment Management, Asia’s expected growth rate of 5.1%¹ in 2020 continues to incite envy in the developed world. Asia also occupies the quality end of the emerging-market universe, making it more appealing to investors, however it’s not immune to the global economic slowdown.

“Asia remains an attractive region, but its economic downturn has yet to hit a bottom," said Ms. Trinh. "The stubbornly low economic growth and subdued inflation leave markets vulnerable to a reversal in sentiment, and we expect a prolonged bottoming-out process with only a gradual recovery. As the world’s growth engine, the path to Asia’s economic recovery has enormous relevance to investors, but recovery is constrained by numerous headwinds to growth and governments’ ability to continue with monetary policy.”

It takes more to generate positive returns in the era of negative-yielding debt

Negative-yielding debt represents a sea of change in the investable fixed-income market, creating undesirable knock-on effects for investors, banks, and policymakers alike. "We have now officially entered an alternate fixed-income reality," said John F. Addeo, CFA, global CIO of fixed income at Manulife Investment Management. “The incapability of traditional monetary policy, including near-zero rates, in stimulating economic growth is the primary driver for negative yields, in our view.”

Beyond policy rates, ongoing quantitative easing by central banks is driving the prices of longer-dated bonds and pushing down yields. Moreover, investors’ demand for income is bidding up bond prices as well.

“A stunning 22% of the Bloomberg Barclays Global Aggregate Bond Index carried a negative yield in November. This was led by the index’s sovereign allocation, of which 31% was negative yielding². Investors should expect low-to-negative rates to persist for some time, though,” continued Mr. Addeo.

“The lower-for-longer scenario may persist, as inflation rates remain stubbornly below policy targets across many developed markets, with massive debt burdens, globalization, aging demographics, and technology-related price deflation all applying downward pressure. Fixed-income managers will require more tools at their disposal in generating income.”

A global research footprint will be crucial in finding opportunities in the era of negative yields. A global network with local teams in market, capturing development firsthand and in real time, will lead to better decision-making and more effective risk management. Finally, a capital structure agnostic view, an openness to high yield underpinned by strong fundamental research capabilities, and a readiness to take advantage of emerging-market debts and preferred securities are possible ways of finding income.

Strong ESG opportunities for active Asia fixed-income managers

As environmental, social, and governance (ESG) trends are changing companies’ business models and regulators are pushing investors to think through issues such as the impact climate risk has on their portfolios, bondholders are becoming more vigilant in accurately measuring and managing these implications.

“Market interest in sustainable investment in Asia is rapidly growing," said Keisuke Tsumoto, head of fixed income, Japan, Manulife Investment Management. "In Japan alone, assets owned in sustainable investment strategies quadrupled between 2016 and 2018, making the country the world’s third-largest sustainable investing markets.”³

However, despite the improvement in corporate disclosure on ESG issues in Asia, datasets remain incomplete and inconsistent. This, in turn, presents a broad opportunity for actively managed sustainable Asian fixed-income strategies.

“Against a backdrop of sometimes conflicting and evolving paradigms for issuing and investing sustainably in Asian assets, stakeholders must conduct careful and collaborative due diligence to avoid muddled results,” added Murray Collis, head of fixed income, Singapore, Manulife Investment Management. “We believe active research and engagement are vital to identifying true areas of ESG risk and opportunity, developing cogent strategies for mitigating or capturing these factors, and strategically integrating these issues into investor portfolios.”

Other key takeaways from the Global Intelligence report

“Pursuing alpha: private equity opportunities in the decade ahead”—Private equity capital has become a more prominent source for financing global commercial enterprises, as returns on that capital are less tied to beta than those from public markets. This report, looks at five ways in which private equity investing can continue to play a positive role in the years ahead.

"Finding value in a late-cycle economy”—With markets now in late-cycle territory, stock price volatility has become a greater challenge for investors. But by solely focusing on short-term stock price movements, investors risk missing out on longer-term value creation opportunities. This report , gives investors a clearer picture of where business value can be generated.

“The OCIO checklist manifesto”—The outsourced chief investment officer (OCIO) fiduciary model is gaining traction among pension plan sponsors and other institutional investors, as worldwide OCIO assets under management grew to over $1.5 trillion in 2017, up more than 14% from the prior year.⁴ This report, spells out six outsourcing considerations for pension plan sponsors.

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