The Hong Kong Investment Management 2020: A Dynamic and Competitive World webinar assessed the impact of COVID-19 on the Hong Kong fund industry and in broader global markets. Speakers focused on three particular areas: Asset prices and stock markets; the growth of Environmental, Social, and Governance (ESG) funds; and how data innovation is impacting active and passive funds.
- Assessing the impact of COVID-19 on the Hong Kong fund industry, speakers at the webinar agreed that in spite of the plunge in stock market prices, equities remain expensive. They agreed that a new strategy is required for this environment of “muted growth”.
- ESG funds continue to grow; attracting $46 billion globally in Q1. However, with no single standard practice to integrating ESG investment process, fund managers must devise their own approach.
- In this new environment, webinar attendees said they believe innovative use of data will drive alpha in active and passive funds. But most crucial will be the skill of the fund manager to create a balanced portfolio between active and passive.
Reeling from the uncertainties of the U.S.-China trade conflict and unprecedented levels of social unrest, 2019 was a testing year for the Hong Kong economy. According to Xav Feng, Director, Lipper Asia Pacific Research, Refinitiv, the territory’s economy shrank during Q4 by 2.9 percent on an annual basis, ensuring that real GDP for the entire 12 months contracted by 1.2 percent.
The unexpected COVID-19 pandemic has since made matters worse.
COVID-19’s impact on Hong Kong
By mid-March, the COVID-19 pandemic had triggered a financial crisis. Stock markets globally tanked by an average of 30 percent — the Hang Seng Index fell by around 20 percent, from 28,843 at the start of the year to 22,805 on 3 March.
On 16 March, in a bid to reduce the pandemic’s financial impact, the Hong Kong Monetary Authority lowered its base rate from 1.5 percent to 0.86 percent, and the Hong Kong Government pumped US$137.5 billion into the economy.
To the surprise of some, these measures worked, with major indices settling at between 70 percent and 90 percent of their value year-to-date.
In terms of valuations, however, stock prices remained comparatively high.
A poll conducted at the Refinitiv webinar Hong Kong Investment Management 2020: A Dynamic and Competitive World, revealed that two-thirds of attendees believed that equities were “still expensive”.
Speaking at the webinar, David Wong, Senior Investment Strategist and Head, Asia Business Development, Equities at AllianceBernstein, said: “When you think about whether or not an asset is expensive, you have to ask the question: In relation to what?
“When you own a stock, you own not just this year’s earnings but all future earnings. This year’s earnings are just a small percentage of the company that you are buying.”
Government and central bank policies are also propping up equity prices, said Thomas Poullaouec, Head of Multi-Asset Solutions APAC at T. Rowe Price.
However, with large cap stocks outperforming small cap stocks by 15 percentage points, and with growth outperforming value by the same margin, investors are positioning their portfolios with the expectation of low growth and a muted recovery.
“This is the new normal,” Poullaouec said, “where managers must adjust their strategies to suit today’s novel investment environment.”
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ESG funds grow in Q1
Despite the market sell-off, ESG funds attracted almost US$46 billion globally during Q1 2020 — inflows in Asia ex-Japan amounted to US$900 million. While this figure may seem impressive, the region’s share stands at just 2 percent.
Deepak Khurana, Performance Director for Fund Ratings and Distribution, APAC at Refinitiv, said that while interest in the style of investing is growing, there remains no single agreed-upon best practice on how to integrate ESG factors into the investment process.
Asset managers are implementing ESG analysis into their investment process as per the resources available to them, corporate reporting on ESG issues, and investor demand.
Asia continues to have limited penetration and needs to go through the learning process of building sustained performance backed by a robust framework to bring ESG into the mainstream investment decision-making process.
A second poll at the webinar found that limited disclosures by corporates was a key challenge faced by investors when incorporating ESG factors into the investment decision-making process.
Pooja Daftary, Research Analyst at MFS Investment Management, outlined further issues the industry faces.
She said that ESG ratings and scores are insufficient in driving investment decisions; regulations emerging in some jurisdictions are encouraging a top-down approach to investing; and that there is no one-size-fits-all way to assess the ESG activities of companies from different countries.
The solution, she said, is to have an investment process that relies on fundamental research and a formed opinion on an individual security, while maintaining active ownership through proxy voting and engagement.
This approach, she added, further integrates all material factors — such as a company’s environmental policy, worker health and safety, remuneration and stakeholder engagement — into the investment decision-making process.
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Data and driving alpha
Data standardization is a challenge to ESG investing. Typically, Corporate Social Responsibility (CSR) activities are confused with ESG adherence. Daftary said: “We need hard data such as performance targets and KPIs that can be measured.”
Data is also enabling the fund industry to make swift and highly informed stock purchases. AllianceBernstein recently leveraged big data analytics to identify a buying opportunity in a car insurer, as vehicle accident claims in the U.S. dropped 90 percent during the lockdown.
Active vs passive investing
Whether a fund is actively managed or passively managed, data is part of this new normal and is a critical element in driving alpha. In a third poll conducted at the webinar, 40 percent of attendees agreed that passive funds will become a meaningful product category in the Hong Kong fund industry, with 22 percent believing they will overtake active funds.
The current active versus passive argument is subjective, said Poullaouec, and down to the skill of the investment manager. It not one versus the other, but rather how they will both feature in a balanced portfolio, he added.