Opportunities in Asia:Sourcing returns while supporting recovery
The Covid-19 pandemic has floored economies across the world, whipping up a storm of uncertainty and volatility that could be here to stay for some time. Financial markets reacted dramatically to the rapidly evolving crisis, and central banks and governments have moved to provide support through significant loosening of fiscal and monetary policy. No asset class has proved immune to the virus and, for the majority of investors, it has been difficult to focus on anything else. Clearly, it will be crucial for pension funds and insurers to monitor the constantly changing circumstances – ensuring they are prepared to act quickly where necessary. However, as long-term investors, keeping an eye out for compelling investment opportunities also remains paramount. Additionally, investors are considering how they can utilise their capital to support the effort to recover from the stress that the pandemic has put on the global economy. So, with that in mind, where exactly should institutions across the Asia Pacific region be looking for strong investments, and how can they support post-pandemic recovery at the same time?
One potentially attractive solution is trade finance, which involves providing financing to buyers and sellers of goods or services. Historically the preserve of banks, trade finance has become more accessible to institutional investors unrestricted by the stringent regulatory requirements that were put in place for banks following the 2007/08 financial crisis. Coronavirus and the ripple effect of pandemic-related lockdowns across the world has forced certain industries to grind to a halt, disrupting supply chains and pushing trade under the spotlight. This raises questions over what it means for bank-originated trade finance. Could concerns over defaults and losses prompt them to withdraw from the market even further? If so, this is a potentially lucrative development for non-bank lenders such as pension funds, whose investments would also be supporting a fundamental part of the global economy.
Interesting opportunities can also be found in consumer debt, specifically in underserved parts of the market where investors can help developing economies by giving lower income or under-privileged groups access to finance and who cannot access financing through high street banks. We know that the coronavirus crisis is going to disproportionally affect those in worse socioeconomic positions or across emerging markets, where it can be more difficult to weather a significant economic downturn, particularly without access to appropriately-priced credit. While there’s a lot to be said for helping people access reasonably-priced financing, it is equally important to ensure that it is done in a fair and responsible way, following best practices.
Another compelling area for investors is infrastructure debt. Across the developing economies, such as China and India, there is significant demand for essential renewable energy infrastructure, giving institutional investors the chance to step in and fill the gaps. Doing so can have both a positive environmental and social impact. As governments look to kickstart the post-crisis recovery in the wake of the pandemic, many will be focusing on infrastructure plans. Institutional investment has an important role to play in financing these projects – which can help to create jobs and boost economic growth. This pandemic has been both a health crisis and an economic crisis, and infrastructure investment is just one example of how investors have the opportunity to support a green and resilient recovery.
Insurers and pension funds have increasingly turned to private market assets to source the yield they used to be able to get from government debt and high quality corporates, and many investors already have large and complex private debt portfolios as they become increasingly confident with the viability of the asset class. There is often good relative value to be found in complex or niche areas of private debt but, as with any asset class, every solution comes with its own unique risks and return profiles. The Covid-19 outbreak has understandably caused uncertainty in markets, but it’s important to bear in mind that there is a very wide range of sub-asset classes within private debt, each with different durations and characteristics. Many of these asset classes also enable investors to channel their capital into investments that score highly from an environmental, social or governance perspective. Despite the turmoil we’ve seen so far this year, interesting opportunities remain and new opportunities are starting to crop up – it all depends on where you look.
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