Sustainability is 2013's buzzword

PHOTO: Sustainability is 2013's buzzword

With 2013 just around the corner, it is time for the savvy investor to take stock of his portfolio and reassess his investment priorities.

Investment strategists are in the midst of issuing their forecasts, and several have noted that the new year could hold some surprises for the financial markets.

As Schroders' head of multi-asset investments, Ms Johanna Kyrklund, pointed out in a recent report: "What many investors currently perceive as safe-haven assets could turn out to be the snake lurking in the grass next year."

The overall outlook

The good news, said Ms Kyrklund, is that the political uncertainty that has weighed on market sentiment is gradually lifting.

The situation is now "uncertain rather than inscrutable", she said in her report.

"Over the last two years, investors have been seeking to gauge who was in charge, what their reaction functions were and what their willingness to back-stop the system was," she wrote.

"We are now at a point where we know we are in the hands of the Germans and the European Central Bank (ECB), that the Germans want deeper union and, based on ECB chief Mario Draghi's comments, that the ECB is willing to step in as required."

The bad news, she added, is that the economic environment is still challenging.

"In the normal way of things, one catalyst for a sustained turnaround in riskier assets would be signs of a turn in the economic cycle. 

"The problem on this front is that we expect more of the same in 2013 - low interest rates and anaemic growth."

The guiding principle

Bank Sarasin's chief investment officer, Mr Burkhard P. Varnholt, believes the one principle that investors should keep in mind as they strategise for the long term is sustainability.

"Our world's political, social, ecological and economic fault tolerance is rapidly decreasing," he wrote in a report.

All investors - regardless of whether private or institutional - are strongly urged to make a systematic, active, sustainability-oriented asset management mandate their top priority, he said.

What this means, simply put, is that investors should assess potential investments not only in terms of their financial performance but also in terms of their impact on society and the environment.

"If a company turns a blind eye to abusive social or ecological practices, it might have got away with that in the 1950s, but no more in the 21st century," Mr Varnholt said in an interview.

"Investors have experienced such setbacks resulting from cases of unsustainable business practices such as BP, investment banks, European peripheral government bonds and other areas. Systematic sustainability analysis is a proven way of reducing exposure to such 'fat tail risks' or very rare events."

Stocks

Schroders' head of global and international equities, Ms Virginie Maisonneuve, agrees that sustainability is the most important issue that investors should think about today.

Speaking at a global media conference last month, she noted that the world's natural environment is being pushed to its limit, and resources are getting ever scarcer.

She gave several tips for investors picking stocks in this environment. 

First, investigate the ability of a company's management team to lead it in a changing political, economic and environmental climate.

Over time, governments will likely introduce new measures to reward companies with sustainable business practices and penalise those that inefficiently or excessively consume resources, Ms Maisonneuve said.

A company with an innovative management team would be better able to adapt to these gradual or sudden changes.

Second, spot the next leaders in innovation.

Companies with innovations in the way we share information or produce, transport and use materials will likely benefit in this new world.

For example, firms that produce technologies which can improve productivity in the water treatment industry will likely profit handsomely as demand increases from emerging markets struggling with climate change.

Companies that can improve the monitoring, prevention and reduction of environmental damage will also profit, Ms Maisonneuve said.

For example, consumer goods giant Unilever has developed dry shampoo and single-rinse laundry products to reduce its customers' water usage.

Stocks are, in general, not very popular assets these days but strategists believe this is about to change as the new year approaches.

HSBC Global Research noted that over the past four years, investors have piled into fixed income investments and have generally taken money out of equities. 

"One trigger for investors to move back into equities would be a realisation of how little they are being paid to own bonds," the analysts said.

They noted that the simple average of the dividend yield on global stocks is 4.3 per cent, while the average global bond yield is 1.4 per cent.

Mr Vasu Menon, the Singapore vice-president of wealth management at OCBC Bank, believes investors will come to this realisation soon.

"We think that 2013 will be a year when we will see a modest turnaround in the economic cycle, given substantive monetary easing by global central banks in 2012," he said.

As a result, he said, some investors might opt out of defensive investments that offer good yields to put their money instead in riskier investments that will benefit from better growth prospects and enjoy capital appreciation.

"Given this backdrop, we are modestly positive on equities for 2013 and see stock markets heading higher, although volatility will remain a fixture," he said.

Mr Menon is especially positive on equities within Asia, except Japan.

He is also more positive on Chinese equities for next year as he believes that a modest turnaround is under way for the Chinese economy, which will become more evident in the coming months.

Franklin Templeton Investments Singapore's head of sales, Mr William Tan, said investors who want to diversify further could also benefit from looking at US companies that garner most of their revenues outside the United States.

MasterCard, for example, gets about half of its revenue from outside the US, he noted. 

"If Asia continues to grow, firms like these will continue to benefit."

Bonds

With yields at depressed levels and credit spreads considerably lower than earlier in the year, developed market bonds are unlikely to reap substantial returns for many investors next year.

Asian bonds, however, offer attractive yields in this low-yield world, noted Mr Rajeev De Mello, Schroders' head of Asian fixed income.

"This year has been a record in terms of Asian bond issuance as more investors buy into the long-term story, and we see no reason why this can't continue," he said.

With no change expected in the low-interest rate policy in the US, the global search for yield is going to continue, he added.

"Asia's growing bond market is one of the few places which offer the desired levels of yield, with spreads over developed market bonds at peak levels," he wrote.

"Asian bonds also offer improving prospects in terms of credit quality, particularly in corporate bonds."

Asean offers an additional story in terms of the increasing quality of government and corporate debt, which has been driven by the continued steady and sustainable development of economies such as the Philippines, Thailand and Indonesia, Mr De Mello added.

Franklin Templeton's Mr Tan said investors should consider bonds that can help them benefit from rising inflation and the growth of consumerism in the emerging markets.

"Urbanisation will drive consumption, which will in turn drive demand for commodities, and this will feed inflation," he said. 

Bonds that invest in commodity-based economies such as Australia, Brazil, Indonesia and Malaysia would thus do quite well, he added.

Another tip: Go for shorter-duration bonds, which will be less sensitive to movements in interest rates, Mr Tan said.

Currencies

UBS' chief investment officer for Southern Asia Pacific, Mr Kelvin Tay, said in a recent note that investment portfolios positioned for the next decade should be biased towards Asia, except Japan, in terms of equity, bond and, more importantly, currency exposure.

"Notwithstanding short-term distractions, one clear trend over the last two years has been the gradual appreciation of Asian currencies not only against the US dollar but also against other major currencies," he noted.

While there are concerns that Asian currencies might weaken as a slowdown in advanced countries affects their demand for Asian exports, it is highly unlikely that Asian currencies will sharply depreciate, he added.

Most Asian governments have manageable debt levels and healthy fiscal budgets and thus face little risk of a sovereign debt crisis.

JP Morgan Private Bank Asia's chief investment strategist, Mr Fan Jiang, agreed, saying that the strong external balance sheets of Asian countries, coupled with their relatively low domestic debt levels will help to prop up their currencies.

The gradual expansion of Asia's asset markets will also attract a good deal of money from investors overseas, which will further strengthen regional currencies, he added.

 
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