Insight archive for Alexis Calla | Standard Chartered

Fintech and millennials – the next investment revolution

Alexis Calla — Tue, 14 Mar 2017 17:26:10 +0000

As wealth changes hands to a new generation of socially engaged millennials in the coming years, the social, responsible and impact (SRI) investment space is set to see significant inflows.

With 91 per cent of millennials interested in sustainable investing, our experts predict that rising millennial wealth could drive SRI investment to USD400 billion by 2020, up from USD77 billion today – and fintech is why.

According to Innovation in Investment, the first in a series of reports we have developed in partnership with the Economist Intelligence Unit, fintech could help make green and impact investment mainstream, with millennials leading the change.

Fintech solutions will make it simpler for tech-savvy millennials to access SRI investments, effectively expanding the borders of an investment space that until recently has been limited to institutional investors such as hedge funds.

No compromise on financial returns

At a recent seminar for our Private Banking clients, a panel of experts pointed to growing evidence that creating social impact does not mean compromising on financial returns. This is helping to make SRI investment more popular.

Two leaders in impact investing – Asia-focused private equity firm Bamboo Capital and the International Finance Corporation (IFC) – invest to meet targets for both development impact and financial returns, and have consistently reported competitive investment yields.

"SRI investments give socially conscious millennials a chance to invest in sectors and areas that matter to them"

At our seminar, Adam Sack, head of IFC’s Emerging Asia Fund, highlighted that since 2000, the fund’s 380 equity investments have delivered realised returns of 26.7 per cent per annum. For context, this is in the top quartile of traditional private equity returns.

SRI investments give socially conscious millennials a chance to invest in sectors and areas that matter to them, forging a personal connection that goes beyond conventional financial returns.

The long and short of investing in an uncertain world

Alexis Calla — Thu, 08 Sep 2016 12:34:38 +0000

Savers and investors tend to focus on the short term, and these days there are plenty of concerns to keep them busy. The impact of Britain’s momentous decision to leave the European Union, the testy US Presidential elections and central banks’ policy manoeuvres to forestall an economic hard landing are just a few of the worries weighing on investors’ minds.

Yet, to invest successfully in a rapidly changing world, it is just as important to understand the longer-term forces that could impact returns.

This means keeping a close eye on economic growth, interest rates, inflation and corporate profits – the four long-term drivers of investment returns – as well as geopolitical risk and technological innovation.

The vicious cycle

The main challenge for economies today is reviving consumer demand. This is daunting given that an increasing share of income is going to more affluent households, which are more likely to save than spend. And because business investment follows consumption, there is less demand for capital. Thus, we have a vicious cycle of lower growth, higher saving and lower investment.

What are the potential implications for investors?

For one, interest rates – the primary source of return for savers and income-seeking investors, and a key driver of asset values – are likely to remain depressed for longer as savings outstrip investment opportunities.

Adding to the downward pressure are the excessively high levels of debt across the developed and some emerging markets since the financial crisis, as well as tighter regulation, which has forced businesses and the financial sector to deleverage.

"Investors should expect lower returns in the foreseeable future"

As benchmark rates on government bonds stay depressed, yield premiums on corporate debt are likely to remain low too, especially for higher grade bonds. This, in turn, is pushing investors to accept riskier bonds.

Equity returns, too, are likely to be suppressed in a world of low growth and subdued interest rates. This is because long-term returns are driven by growth in corporate profits as well as the premium investors are willing to pay on those expected profits.

Over the longer term, earnings growth is highly correlated with economic growth and investors are normally unwilling to pay higher premiums for expected corporate earnings when they are not so sure about future economic prospects. Investors should therefore expect lower returns in the foreseeable future.

Accepting riskier times

Today, those seeking a return equivalent to what a bank deposit would have generated a decade ago will have to invest in a diversified basket of income-generating assets, such as investment-grade corporate bonds, higher-risk/high-yielding debt, alternative assets, such as real estate investment trusts, and stable dividend-paying equities.

It is likely investors will also have to accept growing geopolitical risks, as the influence of the US wanes and world power becomes multi-polar, bringing a greater risk of conflicts as well as rising barriers to trade and the free movement of people, capital and technology.

The rise of protectionist parties and agendas across Europe and the US is a warning sign, and the Brexit vote in the UK merely the latest manifestation of this evolving trend. If it continues, it could roll back decades of hard work in fostering global trade and investments, which has lifted billions of people out of poverty and boosted prosperity through increased productivity.

Rising middle class opportunity

Investors will need to watch closely how the current trend unfolds, staying alert for factors that could reverse it. For instance, increased spending by the rising middle class in the developing world, or reduced pensions saving in the developed world, could be a potent driver of growth going forward.

While household debt continues to rise worldwide (the surge in auto and student loans in the US is just one example), there is significant scope for millions of households in emerging Asia and other developing economies to increase borrowing. This could be a key driver of consumption, while disruptive technologies could boost productivity, yielding innovative solutions to global problems and generating immense wealth.

"Adaptability and agility will be key ingredients of an investor’s success in these uncertain times"

And of course, the trillions of dollars in investment which are required to build modern infrastructure in the emerging markets, and replace aging facilities in the developed world have the potential to drive growth for decades to come.

So while the present environment of heightened risk warrants a balanced and diversified allocation to an array of income generating assets, investors need to be alert to the longer-term growth opportunities and capitalise on them as they arise. Adaptability and agility will be key ingredients of an investor’s success in these uncertain times.

This is not research material and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This commentary is provided for general information purposes only, it does not take into account the specific investment objectives or financial situation of any particular person or class of persons and it has not been prepared as investment advice for any such person(s). Further details can be found in these Terms & Conditions.

All change for Asia’s affluent investors

Alexis Calla — Tue, 19 Aug 2014 23:00:30 +0000

For generations, wealthy Asians built their capital by focusing on their own businesses. Entrepreneurs re-invested into their business, because this provided better returns than most other asset classes. Any spare cash largely went into buying property, a secure and tangible asset.

There was little alternative to this approach. Restrictions in many Asian economies against investing overseas meant entrepreneurs had very limited choice.

Just 20 years ago, local bond markets were either non-existent or under-developed. That meant the only other option was to invest in local shares, taking on unpredictable economic and political risks, not to mention currency risk in the case of investors with an international portfolio.

Sticking to properties turned out to be a profitable strategy. SGD1 million invested in a typical Singapore private property in 1994, say, would be worth close to SGD2 million today. In comparison, a similar amount placed in the benchmark MSCI Singapore stock index would have gained about 40 per cent over the past 20 years, not enough to protect against inflation.

However, going by what has happened in developed economies, this could all change in the coming years and we may see a gradual shift in the mindset of Asia’s affluent towards a more long-term investment approach.

Economic reform could boost investment

The first generation of Asian entrepreneurs prospered by being agile and opportunistic – taking on very concentrated risks rather than accepting lower but more stable returns through diversification.

The next generation is likely to have a very different view of the world. For one, they are likely to be keener on capital preservation. They also have far more investment choices, and the rapid economic development across Asia over the past two decades has reduced volatility and risk.

"Low inflation and interest rates over the past decade will help facilitate a move towards longer-term investment"

Asia’s relatively low inflation and interest rates over the past decade – largely a result of the policy reforms undertaken since the financial crisis of the late 1990s – will help facilitate a move towards longer-term investment.

As large and relatively closed economies such as China, India and Indonesia undertake further reforms to open up and deepen their capital markets, opportunities for investment are likely to grow even further.

Diversification is key to preserving wealth

Domestic bond markets have evolved substantially across Asia in recent years along with the local pension fund industry. Most regulators in the region now allow their citizens to invest in other markets as well, and banking and capital markets have developed to enable them to do so.

There’s little doubt that there will be pressure on the new generation to keep generating the high returns of the past. Thus, short-term security selection and leveraged income investments will remain popular.

However, matching historical returns will become increasingly difficult, as economies mature and growth in Asia slows. Thus, diversification and buy-and-hold strategies will become even more important to preserving wealth.

"There’s value for Asian investors in building long-term portfolios"

Based on our experience with economies going through various stages of development, we believe there’s value for Asian investors in building long-term portfolios as this approach supports the goal of wealth preservation.

This is especially the case for non-professional investors who have a limited time to tend to their portfolios. Their long-term approach and the ability to weather periods of under-performance is a key competitive advantage for such investors compared to professional investors who are forced to worry about short-term performance relative to a benchmark.

We also believe real diversification across geographies and asset classes makes sense because a broad mix of assets reduces risks in the portfolio.

It’s not about trying to beat any particular market; it’s more about capturing alternative sources of returns from diverse markets. This approach, in itself, is going to be a paradigm shift for a whole generation of affluent investors across Asia.

Important disclosures can be found in these Terms & Conditions