Amin RAJAN, CEO of CREATE– Research
Pascal BLANQUÉ, Global Head of Institutional Division Equity at Amundi & Chief Investment Officer
Romain BOSCHER, Global Head of Equity at Amundi
Éric BRARD, Global Head of Fixed Income at Amundi
Moderated by: Adrian DEARNELL, Financial Journalist, Founding Partner of EuroBusiness Media
Monetary Policy: A Non-impact On Asset Allocation
Actually, most strategic asset allocations are suboptimal today and my view is that they will hit the wall in the five years to come, due to interest rates likely remaining extremely low and the combination of a savings glut, a QE glut, and secular stagnation.
In today’s context of aggressive monetary policies, including quantitative easing and negative interest rates, logically we should see a shift in asset allocation. However, Pascal Blanqué asserted that this is definitely not the case: “Actually, most strategic asset allocations are suboptimal today and my view is that they will hit the wall in the five years to come, due to interest rates likely remaining extremely low and the combination of a savings glut, a QE glut, and secular stagnation.”
Mr. Blanqué explained further, noting that currently there is an excess of savings and reserves at the world level parked in low yielding assets with a large bias towards core bonds. Secondly, despite the fact that interest rates gradually fell into negative territories, asset allocations have hardly changed, with a 35 percent average cash component at private banks. The third element of the situation is the fact that the savings accelerator, or, as central bankers call it, the “portfolio balance effect” has not materialized and the savings accelerator has not accelerated. There are many reasons for this: timelag, a combination of regulatory standards, solvency in the transferred space, fear, internal limits and, in some cases, career management. In addition to a lack of investment opportunities, Mr. Blanqué noted that the key rationale to negative interest rates was for people to save more and not less.
The Pension Fund Perspective
Speaking from the perspective of pension funds, Amin Rajan remarked on the how pension plans are responding to financial repression, and whether there is a potential long-term change in investment positioning: “Quite a lot of changes are, in fact, occurring. There are some changes on the asset allocation side, particularly in the techniques of asset allocation. And there are other changes that really apply to the arrival of new asset classes.”
In terms of asset allocation, Mr. Rajan said that we are currently seeing a very broad diversification — taking on board liquid as well as illiquid assets, developed markets versus emerging markets and so on. Risk factor investing has also gained ground. Indeed, approximately 45 percent of pension funds around the world are either considering this particular approach or already implementing it. Finally, about 40 percent of pension plans are moving away from the tail hedges, which were based on stop loss mechanisms or options contracts. Instead, we see a response to dynamic investing as a way of managing risk as well. There have also been changes in the way assets are being managed.
As for asset classes, traditionally there has always been two buckets — the enhanced returns bucket and the hedging bucket. But now, new asset classes have been added to each bucket. “For example, in the returns bucket we have seen the arrival of private debt, we have seen the arrival of distressed debt, and quite a lot of hedging funds are actually investing in these areas. On the hedging side, a lot of investment is going into private equity, into infrastructure, into unit savings, and also into new asset classes like student accommodation, for example, or farmland, or mobile masts,” he said.
“What we are seeing is a move towards both taking on new approaches and implementing new asset classes. What I would like to emphasize, however, is the fact that we are not really talking about dramatic changes here because the scope for making big changes in today’s environment is very limited. People are very scared about making big moves, in case it fails and they turn out to be wrong. We are also talking about organizations that never go into anything unless it has been tried and tested by time and events, so we are really talking about baby steps here,” he concluded.
Negative Rates: Impacts On Fixed Income And Equity Markets
It is all about reassessing risk and taking into account the reality of our constraints and liabilities.
On whether the current market conditions signal the end of fixed income asset management, Eric Brard was positive, saying, “The good news is that this situation, at least, pushes us collectively to reassess everything. One might ask, ‘Why should I keep this very liquid money market fund which is not delivering performance anymore, when I can, just by pushing my investment horizon a bit, switch to some other money market fund that is doing better?’ It is all about reassessing risk and taking into account the reality of our constraints and liabilities. The second bit of good news is that even with a very deep negative rate we shouldn’t need to mix up levels of yields and performance when it comes to physical management. When you buy a negatively yielding bond in the market, which, after three months in is even deeper negative territory, you still make money. So there are of internal opportunities in this market,” he affirmed.
Romain Boscher addressed the equity market implications of this negative rate environment, saying, “Historically, the floor is the limit, so as soon as we discovered uncharted territories, we tended to say, ‘Let our imagination do the job’ because, to be frank, all the old-fashioned models are no longer valid.”
If we are staying for long in this deflationary environment it will spoil the party for equities.
Explaining further, Mr. Boscher said that there have been two phases: the first, in which interest rates fell faster than expected revenue, meant reasonably good news for equities, with valuation rising eventually to bubble territories. The current phase is completely different. Negative interest rates are being discounted, which means that deflationary risk is clearly being taken into consideration. “And I can tell you that if we are staying for long in this deflationary environment it will spoil the party for equities too,” he concluded.
Emerging Markets: When, How – And Why?
Are emerging markets on the point of a return to favour? Panellists were asked whether they believed a renewed positive status for emerging markets was imminent and if it would last. Mr. Blanqué remarked that the question is not when – “It is now,” he affirmed. The question rather is how, he said. “Emerging markets have been the biggest disappointment over the last four years, and there are many lessons to be learned. Investors have been trapped by simplistic stories about emerging markets and currencies that can only go up,” he said. This marketing bubble then burst, leading to a global re-mapping of out-flows over the last four years. “I do think that we are at the turning point. I expect big money from the institutional side of the equation, and this global institutional money is ready to be redeployed in the emerging space,” he stated.
How will shift happen? “People are ready to come back into the emerging market space, but this time it there will be a different approach,” Mr. Blanqué explained. This new approach will include a departure from traditional benchmarks: “It is critical to think beyond classical distinctions, such as America versus Asia. Many investors have been trapped in the definition of global emerging benchmarks — and benchmarks are always a lagging representation of the world,” he said. A more appropriate approach, which Amundi has adopted and refined, is to build groups of countries that share common factors, such as undervaluation of currency, low external debt and commodity-consuming countries.
“I think this is one of our biggest growth areas at Amundi on both the equity and the debt sides,” Mr. Blanqué said.
When we ask why we should prefer emerging markets to developed ones, the real question is whether the market is value-pulled or growth-pulled, added Mr. Boscher. “The beauty of emerging market equities, as of today, is that it is both the value and the growth-pull. It is still growth-pulled because emerging markets are showing four percent growth instead of six percent, but developed markets are now showing three percent growth instead of three, so we are still talking about an area in which the pace of growth remains double that of developed economies,” he concluded.