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Impact Investing

IPE special report May 2018

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Crunch will change the landscape for investors

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The New World Order we refer to on the cover (of Q4 2008 IPA) is no exaggeration, in the light of the recent capitulation we have witnessed in the financial centres of the western world. Although it is too soon to tell what the business landscape will look like in 2009 and beyond, so many big names have been lost in this crisis, we know for sure that the old way of business must change.  

For most of us, this level of uncertainty is unprecedented. The key differences of the credit crunch are the damage done to the institutions that provide the backbone of the financial system, the high level of uncertainty this has caused and the over-riding mood of gloom that is over-hanging the US and Europe, as economic recession begins to bite. 

The more positive aspect of this particular crisis is that there has been clear problem identification and an enormous global resolve and urgency to fix things. 

The mood is less dark in Asia. We can take nothing for granted, though, and certain sections of the Asian financial industry - hedge funds being a good example - will suffer heavy collateral damage. The various national restrictions on short selling are hurting an already embattled industry. One industry observer told me the one word that encapsulates the mood in this section of the market is ‘fear’. Big allocators are nervous about their managers and after a terrible year, some major institutions are bound to have taken the decision to bail out of their hedge fund holdings at the end of the third quarter. The rising financial stress means investors naturally become risk averse. 

This year, at least $75bn of foreign equity has been withdrawn from emerging Asian markets, and this may continue. Overall though, with emerging economies still growing strongly, this is a relatively positive starting position for investment returns to recover. 

The consensus in Asia is that the region will be affected by the weakening external demand factors and by the continued uncertainty in the financial sector. However, Asia is unlikely to experience the severe downturn in sentiment seen during the 1997-98 crisis. Ping An has managed to extricate itself from Fortis, and while Asian banking and finance institutions have not escaped the credit and solvency contagion, they have so far not been undermined by it. 

The concern now is not about solvency issues in Asia, but the relative slowing of growth in the key economies, combined with rising inflation and an expected appreciation in currencies. These threats to Asia’s continuing success are real and something that require firm policy and direction. That is something we have come to expect from China, less so from India. Have the major growth engines become complacent? Their growth is slowing but, at 8% for China and 6% for India, that still has them on course to double the size of their economies in the next 10 years. 

Renowned Asia commentator Dr Jim Walker, former chief economist at CLSA Asia-Pacific, has a rather more bearish view in the short term. He predicts that Asian economic growth will halve over the next year. Nonetheless, he believes the regional economy will eventually lead a global recovery because of firm fundamentals: “By the second half of 2010, Asia will lead global growth because the relatively low indebtedness of Asian firms will aid faster corporate earnings recovery.” 

Walker also predicts that by the end of 2010, the majority of Asian countries will allow exchange rates to float and introduce monetary and credit targeting. “Too many countries in Asia have allowed themselves to follow the loose money policies set by the major central banks,” he adds. “Monetary growth has been too strong in Asia, and now consumer and food price inflation is a problem.” 

Adrian Orr, chief executive officer of the Guardians of New Zealand Superannuation, is looking beyond the credit crunch. He says: “It will come as no surprise that over the course of this year we posted a negative return, and the environment has got tougher since. We have deliberately spread our operational risks, which minimised our direct exposure to the Bear Stearns and Lehman Brothers collapse, and the AIG bail out, to less than 0.1% of our fund.” 

By far the biggest impact on fund returns has been the indirect effects of the recent financial market turmoil. Nonetheless, the fund’s managers are evaluating new investment opportunities - which Orr says are on the increase. He says: “As our liquidity becomes a rare commodity. We are also exploring strategies that allow us to ‘lean against the wind’, and increase our exposure to investment classes like shares or bonds that appear good value. But we do not underestimate the seriousness of the current financial and economic challenges. We take some lessons from previous business cycle swings and past financial crises, which are far more common than people care to remember. “Since the 1970s alone we have experienced commodity price and equity price shocks, the US Savings and Loans and the UK banking crises of the 1980s and early 1990s, the Asian Financial Crisis of the late 90s, and European and Latin American banking, currency, and economic crises. Each event brought its unique challenges, solutions, and eventual recovery.” 

An encouraging aspect, in the aftermath of Wall Street’s meltdown is that Asia hasn’t collapsed, as it would have done 10 years ago. Those who doubt the strength of the region should now take note. Several of IPA’s regular contributors have provided their insight into the credit crunch for this edition. We hope this helps put the Asian region’s response and challenges into better perspective.

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  • QN-2436

    Asset class: Real Estate - Core Open-ended Real Estate Equity Fund (non-listed).
    Asset region: Asia Pacific.
    Size: Approx. CHF 70-100m per investment.
    Closing date: 2018-05-25.

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    Asset class: High Yield Bonds.
    Asset region: US.
    Size: USD 300 million.
    Closing date: 2018-05-25.

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    Closing date: 2018-05-31.

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