GIC’s CIO outlines three opportunities for yield
27 May 2013
News, Asia, China, Global, Emerging Markets
By Hui Ching-hoo
Lim Chow Kiat, group chief investment officer at the Government of Singapore Investment Corporation (GIC), expects technology, the rise of the middle classes in emerging economies, and trade liberalisation in ASEAN to be the key factors that present yield-chasing investors with opportunities in the midst of the low interest rate environment.
Speaking at the CFA Institute Annual Conference in Singapore on May 21, Mr. Lim said that historically low interest rates are clearly impacting investor sentiment: “It seems more and more investors are searching for yield and taking risks. It is useful to understand the reasons for investors doing what they do – chasing yields [because it tough to find it elsewhere].”
He cited three reasons for the situation: a belief that current low interest rates will prevail for a long time; a belief that even if interest rates were to rise, cash flows would rise to at least compensate for the rising discount rate; and the need to avoid accruing negative real yield over the short-term.
“Investors should firstly tease out the systemic risks in the portfolio and identify the reliance on and exposure to big market betas (especially interest rates), running factor analysis to identify common drivers and scenario analysis to identify tail risk,” he adds.
“Second, adjusting returns expectations: There may be spending plans, liabilities, and wealth goals riding on the expectations of capital owners, which may have implications for the investment agents’ business. Careful examination is required, but it’s very important to be realistic in order to avoid excessive risk taking, which may lead to difficult long-term funding positions.”
“Third, even without adjusting overall and eventual returns expectations, it is time to review the investment approach, especially critical assumptions related to the need for short-term returns, and the importance of capital preservation and peer comparisons.”
Pointing to investment opportunities, Mr. Lim opines that the world of technology continues to throw up new opportunities, especially where the virtual meets the real, such as e-commerce or e-tailing. Second, there is the mega trend of a rising middle class across many emerging economies. “It is an opportunity not to be missed by any investors, even as occasional setbacks are inevitable. To be clear, this does not necessarily mean making a large allocation to the assets domiciled in the region. One has to assess where value is created and pick the right exposure vehicles accordingly, for example, in multinational consumer companies.
“Third, ASEAN offers significant opportunities. Beyond the continued rise in income, investors will benefit from the ASEAN free trade area coming into being in two years (before end-2015) and China’s transformation from being a foreign direct investment (FDI) competitor to being an export customer. While valuations are currently low, the longer term prospects are not to be missed.”
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