Singapore’s central bank chief and a state fund investment executive urged investors to understand that they are now operating under very different circumstances and in the shadow of a number of key risks, and warned that decision-making based on historical data will itself pose a major risk.
The investment environment now is “profoundly different” from the past two decades, Ravi Menon, managing director of the Monetary Authority of Singapore, said at an investment conference last week.
He listed three key uncertainties that will drive returns and risk in asset markets: inflation in the short term, and geoeconomic fragmentation and climate change over the longer term.
He said inflation has fallen back from last year’s peaks but remains high and so central banks will continue to raise interest rates.</p
“The key challenge facing most central banks is to secure a return to low inflation without incurring too large a cost to growth or financial stability,” Menon said in a speech at the Investment Management Association of Singapore conference on March 9.
He warned that financial markets may take a while to adjust to an environment of higher interest rates after an era of cheap money, and that the adjustment may not be smooth. “Against this backdrop, investors will need to consider building greater resilience in their portfolios,” he said.
Geopolitical factors like US-China tensions which have reshaped global trade patterns and supply chains, increased cross- border investment restrictions, and slowed economic growth are medium-term risks.
“Geoeconomic fragmentation elevates financial market risk and disruption, as capital flows become more regionalised and less global. Consequently, this reduces market liquidity and returns and increases market volatility,” Menon said.
Climate change is a long-term risk, and he noted that it’s hard to predict the effects on the global economy and asset markets due to uncertainties in modelling and impact assessments.
On the upside, he pointed out that there are opportunities in sustainable investing in Asia, citing McKinsey’s estimate of US$9.2 trillion of annual investment needed for the world to reach net zero by 2050, with one-third or $3.1 trillion of that in the Asia Pacific region.
Meanwhile, Liew Tzu Mi, Singapore sovereign wealth fund GIC’s chief investment officer for fixed income and chair of its sustainability committee, called on investors to discard old habits.
She warned that it’s “very dangerous” to assume historical correlations and relationships will hold in the new investment environment, and that to do so “is a big risk in itself”.
“And therefore the mantra is really to prepare, rather than predict. As an investor, it becomes even more important for us to think about scenarios, think about ways to conduct different stress tests on portfolios,” she said during a panel discussion at the conference. “Think about diversifications along multiple dimensions and think about resiliency to the portfolio, including climate resiliency.”
According to Liew, the growing risk of climate change means that every investor must eventually become an environmental, social and governance expert.
“Because the reality is, sustainability as a factor is going to drive and affect every sector in the economy and every country in the world. And this is going to be, frankly, for the rest of our lifetime,” she said.
