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Which sectors should investors be watching closely for signs of future weakness in the coming year?
Like most investors, we look at a couple of key drivers for equity markets. We first look at the development of the economy, since there is a high correlation between economic growth and equity markets. However, 2020 was the big exception! We don’t expect that to happen again. Secondly, we look at interest rates – the base for all risk premia in asset classes. Thirdly, we look at valuations, and finally, investor sentiment, which is more of a short-term indicator and plays an important role.
After the coronavirus crisis and its economic fallout, we expect an economic recovery in 2021. The odds of a recession, which is always a worry for investors, seem very low in such an environment, so no concerns about weakness here. We’re also not much concerned about interest rates, since central banks will be very reluctant to spoil the economic upturn after such a drag. Central banks will keep interest rates at the current low levels and quantitative easing will be continued. Valuations look a bit expensive, with price-earnings at about 20, but these valuations are sustainable with current interest rates, and as a result, risk premia are still attractive. However, there is room for some correction here, although big swings are not expected.
Lastly, there is sentiment. Over the course of the year, there is a chance of some over-optimism, which could result in periods of weakness. At this moment, some overconfidence seems to be building up already. Investor sentiment will, however, merely lead to short-term volatility rather than being the start of a long-term price trend. So, all in all, we are pretty constructive and, despite some volatility every now and then, foresee little signs of weakness. Of course, as always, there are the unknown unknowns. Who could have expected Covid-19 this year?
2020 in three words: Volatility, disparity, distance
Book recommendation: Brave New World by Aldous Huxley – probably a re-read for most and by no coincidence the title of our 2021 outlook.
Lockdown hobby: Recently, I have been playing chess with my children thanks to the miniseries, The Queen’s Gambit. And since I’m working from home quite a lot, I have been listening to music while working, especially NWOBHM (new wave of British heavy metal).
Which sectors should investors be watching closely for signs of future weakness in the coming year?
The energy sector has underperformed significantly this year as the pandemic-induced lockdown caused significant demand destruction. Low oil prices are stressing balance sheets. Valuations have come down, but the outlook for a demand recovery is highly uncertain and there seems to be a risk that Opec might partially reverse some supply cuts.
Materials is a sector that is highly sensitive to trade and business cycles. Although we expect a continuation of the global economic recovery, significant uncertainties persist and are likely to dampen a recovery of investment spending. Expected earnings growth is poor and no significant rebound in commodity prices seems likely any time soon.
Industrials have to cope with significant structural headwinds from the pandemic, the lockdowns, and shifts of consumer and investment behaviour. Low oil prices are expected to pose a headwind for capital expenditure, and market volatility is likely to induce companies to keep investment expenditure low. Aerospace and transportation is hit hard due to massive cuts in air traffic and travel bans. Airlines will heavily scrutinize their investment plans as significant parts of air traffic seem to be irrecoverable.
2020 in three words: Lockdown, Trump, vaccine
Lockdown hobby: I wouldn’t like to call it a hobby, but the best side-effect of lockdown for me was being able to spend more time with my young children.
Book recommendation: Enlightenment Now by Steven Pinker
Which sectors should investors be watching closely for signs of future weakness in the coming year?
Positive news about Covid-19 vaccines has triggered a dramatic turnaround in sentiment. In the midst of the second wave of infections in Europe and the US, investors took an extreme positioning in favour of growth stocks, which was to the detriment of value stocks at the beginning of the fourth quarter. After nearly 10 years of record outperformance by growth stocks, we are in midst of a cyclical rotation into value stocks.
The question investors naturally ask is whether it is now time to switch their exposure to value-tilted sectors, such as banks, industrials and energy. Many resort to measuring the risk premium of the value factor by comparing the valuation of oil and financial stocks with that of the information technology and healthcare sectors. We find it more informative to measure the value risk premium using the intra-sector valuation spreads.
By the end of March 2020, these spreads had peaked to near historical highs. If the economic recovery is confirmed in 2021, thanks in particular to vaccinations, these spreads should return to their historical average. We have already covered two-thirds of the way back. The value rally actually started in April. If we move the last third towards the average, value stocks should outperform by another 20% to 25% in the coming weeks and months.
A normalisation of economic activity over the next 12 months should allow cyclical stocks to outperform further. However, a long-lasting structural reversal of their performance would require a sustained acceleration in nominal global GDP growth and inflation. We are not there yet. It will take a few more years before the merger of monetary and fiscal policies in developed economies leads to sustainable reflation.
2020 in three words: First exogenous recession
Lockdown hobby: Increased family time. We did our best to turn it into quality time, with some memorable hiking sessions in the Swiss Alps.
Book recommendation: The Great Rupture by Viktor Shvets.
Which sectors should investors be watching closely for signs of future weakness in the coming year?
A big focus is whether or not there will be a sustained reversal in the relative performance of growth versus value in 2021. For the bulk of the last several years, the growth style has held the upper hand, with value lagging. This has pushed some value sectors to very low relative valuations. If we see signs that the underlying fundamentals are shifting, which could be driven by expectations of incremental strength or weakness ahead, the relative performance dynamic could be substantial. Fundamentals always win in the end, so watching the segments of growth and value with stronger fundamentals, such as subsets of technology, healthcare, financials and industrials, will provide important clues.
2020 in three words: No polite adjectives
Lockdown hobby: Rowing – on the water when possible and on a machine at home when proper rowing was not allowed. This helped me a lot!
Book recommendation: Dopesick by Beth Macy – unpleasant subject matter but an outstanding exploration of the opioid crisis that deepens understanding on several levels.
Which sectors should investors be watching closely for signs of future weakness in the coming year?
Equity fund managers should pay attention to the continuation of the rotation into value/cyclical and clean energy sectors. We expect growth sectors to underperform in the first half of the year. Companies that are not entirely ESG-compliant should be avoided. Moreover, a deeper analysis of companies’ free cash flow generation has to be implemented given the high vulnerability of some sectors, such as leisure, travel and airlines, to the pandemic.
Among the main asset classes, we expect core government bond yields, particularly the Treasury’s yield, to gradually move higher next year as a consequence of the global recovery due to the vaccines and the lifting of lockdowns. While we see the increase in the US Treasury’s yield to be tempered by the de facto Federal Reserve System’s adoption of the yield curve control, the asymmetric risk they present, given the very low level of their yield, has to be addressed by the bond managers and clearly explained to clients.
2020 in three words: A new beginning
Lockdown hobby: Long walks in the park with my dogs.
Podcast recommendation: If You Take Yourself Too Seriously, You Are One Big Joke! by Sadhguru.
Which sectors should investors be watching closely for signs of future weakness in the coming year?
Positive vaccine developments have led to a rotation in performance across equity sectors as investors begin pricing in a step towards a return to normality. On the one hand, sectors deemed to be most hard-hit by the pandemic, including energy and leisure, have outperformed. On the other hand, ‘winners’ from the pandemic, including technology stocks, have generally lagged.
This year has shown investors the need to be wary of having strong preconceptions about what the future holds. Different sectors have different sensitivities to economic regimes. Growth-sensitive sectors such as energy and materials tend to outperform when the economy is accelerating, while a deceleration in the economy tends to coincide with the outperformance of defensive sectors, such as consumer staples and utilities.
Having a view on which sectors will outperform and underperform requires assessing how the economy will evolve. Unfortunately, anticipating accurately what is in store for the economy beyond what is reflected in asset prices is no easy feat. At Barclays Wealth we generally avoid focussing too much on investing within specific sectors, but rather advocate diversified multi-asset exposures based on long-term strategic views.
We do at times adjust our portfolios at an asset class level (stocks, government bonds, credit, emerging market debt, etc) if shorter term opportunities from temporal mispricing present themselves.
Investors should be aware that the bulk of their returns will be determined by their long-term strategic asset allocation – not timing sectors or asset classes. We believe investors are best served by focussing their attention on gaining exposure to properly diversified and cost efficient multi-asset portfolios, rather than attempting to time/select sectors.
2020 in three words: Adapting, medical science, solidarity
Lockdown hobby: Running and keeping up with reading books on financial history. Although, with three young children, I had limited time for hobbies.
Book recommendation: The Tyranny of Merit by Michael Sandel, and The Myth of Capitalism by Jonathan Tepper and Denise Hearn
Which sectors should investors be watching closely for signs of future weakness in the coming year?
I would focus on a few factors that could provide early warning signs of impending problems. First is oil price. Much of the recent pick-up in value sectors and stocks has been driven by the conviction that Covid-19 vaccines will foster the emergence of a new economic cycle and higher demand for oil. Moreover, China has been busy boosting its strategic oil reserves while capital investment has collapsed in recent months, in particular in US shale. All of this should be bullish for crude prices – a downward breakout in oil prices would herald a very different economic backdrop.
Second is the long bond. We’ve seen 10- and 30-year yields shift higher as investors became convinced that cyclical strength would bring inflationary pressures. However, even after the recent rise, 10-year yields remain around three standard deviations below their 10-year mean, and real yields (using average headline inflation over the past three years) remain sharply negative at -1%. If bond markets continue to normalise, higher nominal yields would put severe pressure on growth stock valuations. Conversely, an abrupt shift back to recent lows in yields would signal that the recovery is running out of steam, which is a recipe for a downward reversal in value stocks.
Third is the US dollar. The move lower this year has been driven by a number of factors: the Fed has flooded the system, increasing its asset holdings by $3tn (£2.2tn), removing any risk of a dollar shortage; the tariff war with China has done nothing to improve the US trade and current account deficits; the US has borrowed more per capita than any other G7 economy to combat the Covid-19 crisis; real short rates are among the lowest in the world; and the dollar remains sharply overvalued, even after this year’s decline. Moreover, the dollar is often used as a safe haven in times of trouble, a role that seems less pressing if the macro cycle is turning up. If the greenback turns decisively higher, it would be time to get back to the drawing board.
2020 in three words: Pangolin, Powell, Zoom
Lockdown hobby: Running
Podcast recommendation: Grant Williams’ The End Game
2020 in three words: Unexpected, extreme, exciting
Lockdown hobby: Walking in the forest
Podcast recommendation: Macro Voices
What are the most challenging areas to apply an ESG investment approach to, and why? And how are you dealing with this obstacle?
For many customers and asset managers, ESG and other measures of sustainability are very important. To be able to show that your processes are living up to high standards, you have to rely on metrics from different providers. Therefore, I think one of the most challenging areas is government bonds, both DM and EM, where there is a lack of data and clear standards of measurement. We mitigate this problem by using internally developed measures and having involved discussions with managers, especially the managers we are invested in.
We use an internally developed Sustainable Development Goals (SDG) model to screen and measure all the funds we are invested in. We monitor a huge number of companies on a regular basis. Our sustainability team, together with portfolio management services in the fund companies, have dealt with this challenge by creating an algorithm that screens and utilises technology combined with human intelligence to assess and score companies on their attribution to the SDGs.
2020 in three words: Working from home
Lockdown hobby: Training more and taking care of the family and house
Book recommendation: Life 3.0 by Max Tegmark
What are the most challenging areas to apply an ESG investment approach to and why?
As interest and inflows into sustainable investments accelerate, one of the challenges is the availability of credible products across asset classes that enable investors to build out and manage fully diversified sustainable investing portfolios.
Encouragingly, products are being developed to address outstanding gaps in portfolios. Hedge funds are an example, where we see the potential for greater efficiency in capital allocation from a sustainability perspective compared to traditional long-only exposure, as well as potential portfolio benefits through diversification, risk mitigation and alpha generation. Investors focused on sustainability need to form a view on why these strategies are additive within portfolios and for the overall market and consider aspects like transparency and short-selling. While there is still no general industry consensus on many of these issues, compelling approaches are emerging across strategies, and investors will have to make individual decisions on inclusion given their individual context.
Similarly, building sustainable fixed income portfolios also presents challenges. Green bonds remain the most popular form of ESG instrument in fixed income, with the market having grown to $850bn since 2008. But, in a global context, green bonds remain a small market. Also when looking beyond green bonds to add higher-yielding corporate bonds to the portfolio, the issue of sufficient supply resurfaces once again. This is particularly challenging in emerging markets, where environmental, social and governance standards may not be as rigorous as in some developed markets, making it more difficult to find sufficient instruments to build a properly diversified portfolio. Accepting bonds issued by companies transitioning to higher ESG standards into sustainable portfolios increases the size of the potential universe, but as with hedge funds, there is no industry consensus on this approach. We use a multi-vendor approach to ESG scoring in a portfolio framework that can adjust for regional differences to address some of these challenges.
As the sustainable investing market matures and the product continues to proliferate in quantity and quality, these issues should resolve over time. Our approach is to innovate in areas where we see a need for solutions, utilising consistent frameworks and principles for what we expect from such exposures and what we intend to achieve within investment portfolios and across the broader market.
2020 in three words: Rights became privileges
Lockdown hobby: Burpees
Book recommendation: Siddhartha by Herman Hesse and The Power Broker: Robert Moses and the Fall of New York by Robert Caro
What are the most challenging areas to apply an ESG investment approach to? How are you dealing with this obstacle?
Alternative investments, for several reasons. ESG methodologies for alternatives are less developed compared to equities and bonds and less external analysis is available, making it more difficult to objectively measure ESG. Private market investments also have a greater degree of uniqueness compared to public markets, which means standardisation of internal processes, measurement, and comparison of investments is more challenging.
Alternative investment processes need to be different from traditional processes, since illiquidity and the long-term nature of many alternatives require a more thorough due diligence and more pre-investment analysis. It also means there is less room within alternatives to choose which ESG strategy to use. ESG-related risks are more challenging to measure due to lack of data or costly acquisition of data, and impact on the environment and society are often driven by other factors than usual in traditional investments. For example, measuring the carbon footprint of real estate investments is easier than measuring the social impact. Illiquidity and the long-term nature of many alternatives also has implications for allocation and diversification.
The majority of our customer’s wealth is still allocated to traditional asset classes, and diversification of ESG risk and the possibilities to act on these risks are more limited than in the liquid space. A smaller allocation also means the cost for the ESG process for alternatives must be kept in control not to compromise return. Cost, quality and efficiency can be achieved through cooperation between investment units and ESG analysts on the assessment of ESG and developing methods, keeping up with best practices and staying up to date with regulation.
2020 in three words: Unpredictability, lockdown, transformation
Lockdown hobby: Windsurfing & paddle-surfing
Podcast recommendation: Life Safari by John Strelecky
What are the most challenging areas to apply an ESG investment approach to, and why? And how are you dealing with this obstacle?
A study by the Organisation for Economic Co-operation and Development found that the average correlation among ESG score providers’ assessment of firms in the S&P 500 was just 0.4, demonstrating the large variation in ESG scores among providers.
In addition, ESG scores tend to be backward looking. Investors in firms with high ESG scores reward businesses for what they have done, not for what they will do in the future. While this has some value, it’s not useful in the context of the transition to a sustainable economic model, nor is it adding performance to clients’ portfolios.
In response to these observations, as early as 1997 we developed our own ESG methodology. In our process we add qualitative assessments and weigh criteria differently in relation to their relevance for the sectors and firms in question. Through stewardship and engagement, we can look past any presentational shortcomings that often plague smaller firms’ sustainability reporting and gain a deeper understanding.
However, in order to improve portfolio performances, we need to go further. Our current economic model is unsustainable. We call it Wild, which stands for wasteful, idle, lopsided and dirty. It’s vital that societies aim for a new, sustainable economic model, which we call Clic, which stands for circular, lean, inclusive and clean. The crucial question is how we manage this transformation. It will involve dealing with a number of challenges - zero waste, dematerialisation, fair society, zero emissions, regenerative nature, resource efficiency, secure society, adaptation and resilience.
We are currently developing new metrics for each of these challenges. For instance, we have developed a Paris Agreement temperature alignment tool that allows us to graph a company, sector, index or portfolio in terms of its current “temperature” and its future trajectory. Businesses that are high emitters of carbon dioxide but have a clear path towards Paris Agreement alignment will be the champions of the transition to a sustainable Clic economy because they will contribute to the decarbonisation process. Firms that have already cut emissions, or are part of low-emitting sectors, are not the ones that will make the difference.
In order to thrive as the world economy transforms, businesses will have to address sustainability challenges and provide solutions. We are building metrics that allow us to identify the drivers of change in the eight sustainability challenges mentioned above, and gain information advantage that can boost portfolio performance. Businesses that will contribute the most to the transition will generate superior financial returns for our clients.
2020 in three words: Teamwork, resilience, digitalisation
Lockdown hobby: Hiking in the Swiss Alps with my dogs Maddy and Oxford
Podcast recommendation: Not podcast but a video. Bill Gates’ TED talk in 2015, The next outbreak? We’re not ready
What are the most challenging areas to apply an ESG investment approach to? How are you dealing with this obstacle?
ESG has been very much an in-vogue area. E refers to environmental, and that seems to easily capture the imagination of clients, journalists and others because you can talk about renewable energy and other environmental concerns, of which there are a huge number.
The S refers to social. There’s been a lot of focus on S this year. For instance, the psychological wellbeing of people during lockdown, and the talk about racial and sexual diversity and equality.
The G refers to governance, and I think the G gets somewhat forgotten. Corporate governance is a huge issue to be dealt with, where we can make real inroads. I have been looking at whether companies with good corporate governance, who look after and communicate well with investors, systematically perform better. I think the answer is yes, to some extent. But what they do as a group is tend to reduce risk. From a group of European companies with strong corporate governance, you get the same or slightly better returns in an absolute sense versus a benchmark. However, you do this at lower volatility, lower downside risk.
Strong corporate governance removes some of the idiosyncratic risks you have when investing in individual companies, or in funds or ETFs based on equities. There’s a strong investment argument but we face great difficulty convincing clients in this concept versus, for instance, the E and the S.
2020 in three words: Volatility, volatility, volatility
Lockdown hobby: Indoor cycling
Podcast recommendation: Patrick O’Shaughnessy’s The Investor’s Field Guide
What are the most challenging areas to apply an ESG investment approach to?
Despite the acceleration of ESG investing in recent years, including strong growth throughout the global pandemic, the market still faces some challenges when it comes to integrating a full sustainable investing approach.
While some approaches have flourished, such as the green bond market, the lack of a clear definition around climate transition scenarios and related KPIs has resulted in the lack of a coherent understanding in the market. That said, there are numerous market participants who are working to improve this situation. As an example, Credit Suisse has collaborated with the Climate Bonds Initiative to address the lack of an industry standard in the transition bond market by developing a framework that is intended to provide uniform guidelines.
The biggest range of available ESG solutions still lies in listed equities, with new strategies continuously added, but some asset classes such as commodities have been slow to adapt. Infrastructure and private equity, for example, face the challenge of a lack of availability of public ESG data, but the nature of these two asset classes allow for investors to engage directly and more closely with management teams, driving a focus on ESG at the fund and asset levels. But not all asset classes are as developed to account for this.
Areas with weaker reliable data coverage, such as emerging markets or small caps, pose a real challenge when it comes to establishing an applicable ESG investment approach. The industry will work together to overcome these challenges, and as a result, we will eventually reach the point where we lose the distinction between ‘sustainable’ and ‘traditional’ investing.
2020 in three words: Virus, volatility, value
Lockdown hobby: Zoom calls with clients
Book recommendation: Brief Answers to the Big Questions by Stephen Hawking
What was the most recent investment idea you have implemented with your fund selection team?
We have recently increased our exposure to equities via an increase of emerging markets equities. That was the last transaction we implemented. For the coming years, there are two important challenges to address: the low-yield environment and the strong growth in ESG investments.
The first is how to address the low-yield environment from both return and risk perspectives. With rates this low, the search for yield will only continue as an addition to fixed income investments. Diversification is reduced as it will be difficult for rates to go lower, so alternatives to provide diversification will also be needed.
Second, we continue to see a strong demand for ESG investments and expect this will continue over the coming years. The challenge will be to find sufficient funds that live up to our social responsibility investment (SRI) criteria as well as the investment quality we are looking for.
2020 in three words: Special, challenging, interesting
Lockdown hobby: Hiking
Podcast recommendation: Macro Voices
What kind of challenges the fund selection teams will have to address in the next two years?
One of the main challenges will be the difficulty for fixed-income managers to generate positive returns. In a low or negative yields environment, absolute return fixed income has been a tough place to generate value. It will also be challenging to find mutual funds with solid investment processes capable of generating uncorrelated alphas. Selectivity will be paramount given it will continue to be difficult to find good stock pickers, especially in the US equity space. Today, passive investments represent more than 50% of all funds, which makes stock pickers’ task even more complex. The rise in passive investment should remain a concern.
Overall, with the current high valuations, we expect 2021 and 2022 to favour stock pickers across all sectors. Managers will make more money from stock picking rather than from sector allocation. Country selection will be key too.
2020 in three words: Speed, massive and science
Lockdown hobby: Mountain biking with my son
Book recommendation: The Damned Legions by Santiago Posteguillo
What was the most recent investment idea you have implemented with your fund selection team?
We recently added Chinese sovereign bonds to our portfolios. At 3%+ yields in a currency we expect to appreciate steadily against the US dollar, Chinese government bonds offer income oriented bond investors attractive total return potential. Moreover, with China running a more traditional monetary policy, and the Chinese yield curve comparatively steep versus US and EUR yield curves, it offers balanced, asset allocation investors more symmetric risk-reward in fixed income, which is no longer available in either US or Euro-denominated sovereign bonds.
Should cyclical recovery take hold locally and globally, we expect the Chinese yuan to strengthen, bolstering returns to investors and mitigating the prospect of a further steepening in longer dated yields.
Should the global recovery falter, 10-year Chinese yields have greater capability to fall and cushion portfolios against declines in more risky asset exposure to global recovery.
In the coming years, a key challenge for fund selection teams will be the one reflected by our recent purchase of Chinese government bonds. In both equity, fixed income and alternative strategies, we are looking at more niche sub-sectors of asset classes that do not have substantial investible history and may not have managers with the track record that one normally finds in more mainstream asset classes.
This is why close partnership with fund managers, or even the development of specialised internal capability in certain segments, will be key to continuing to add value and generate investment returns for clients in the brave new world that lies ahead.
2020 in three words: Accelerating global transformation
Lockdown hobby: Baking
Podcast recommendation: Real Vision’s Has Everything Changed? With Raoul Pal
What was the most recent investment idea you have implemented with your fund selection team?
The last fund idea we implemented was on e-mobility (including other alternatives, like hydrogen, to traditional combustion engines). E-mobility is one of the key pillars in transitioning to a carbon-neutral economy, and government funding and improved economics are driving the electrification of transportation equally.
Regarding its implementation, we have selected the RobecoSAM Smart Mobility Equities fund. The fund invests globally in companies within the fields of e-mobility, connectivity and autonomous driving. It is being managed by a strong interdisciplinary team, combining thematic, financial and sustainability expertise. We see the fund as a promising long-term portfolio satellite for investors who can accept short-term volatility.
The challenges – increased cost transparency and the availability of cost-efficient ETFs for virtually every investment segment – make it even more important to have a fund offering with truly active and highly competitive managers. In this new world, there simply is no room for benchmark-huggers charging high fees without taking active bets.
2020 in three words: Digitalisation, dual-stimulus, realignment
Lockdown hobby: Doing puzzles
Book recommendation: The Four by Scott Galloway
What was the most recent investment idea you have implemented with your fund selection team?
Our most recent investment idea was to search and select ESG-rated strategies in thematic and megatrend investing, in particular towards changes linked to a post-Covid world, such as healthcare innovation, biotech, automation, smart city, smart mobility, clean energy, clouds, e-commerce and digital infrastructure.
New challenges for the next couple of years will be detecting funds that invest into ESG unconstrained global bonds-based strategies as well as green bonds. Investing into new bond issuance linked to real asset projects and infrastructures will be a key driver for the recovery and the new normal. A further challenge will be to discover new growth areas in selected emerging markets in order to capture new private consumption trends.
2020 in three words: Upsetting, disruptive change
Lockdown hobby: Gym and cooking
Book recommendation: Book of Numbers by Joshua Cohen
What is the most promising area of alternative investments at the moment?
The most promising area of alternative investments is linked with our economic scenario. We anticipate a strong rebound on the economy. The most important fact is that the Fed will keep its nominal rates on low levels until at least 2023. During that time, with the economic improvement and strong fiscal and budgetary support, there will be higher inflation anticipations. That means lower real rates, which will be helpful for value reserve stocks such as gold and silver. At the same time, other precious metals, such as platinum and palladium, will benefit from the industrial improvement. To play those strategies, we use a fund like OFI precious metals in our portfolios.
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What is the most promising area of alternative investments at the moment?
Private equity, real estate debt, infrastructure debt and event-driven hedge funds. We have strong expertise in private equity and private debt, which is why we invest in our funds along with our clients.
2020 in three words: Working from home
Lockdown hobby: Training more and taking care of the family and house
Book recommendation: Life 3.0 by Max Tegmark
What is the most promising area of alternative investments at the moment?
Our private assets teams remain very active in the alternative investment domain, as 2020 offered a favourable environment for distressed debt investments. Distressed debt funds have been opportunistic in this exceptional environment, which was characterised by record liquidity stress, unusual spread widening and a number of unforeseen events, some of which will benefit from the distribution of Covid-19 vaccines from early 2021.
We are set for a more constructive outlook for next year, which could unlock many situations and trigger reversal trends in distressed industries and companies.
Infrastructure is offering interesting investment opportunities to wealthy clients with long investment horizons while contributing to the transition towards a green recovery.
Our teams have developed relationships with leading investment houses across these fields, enabling us to diversify our mandates on private assets.
Private equity is a unique asset class, giving access to a bigger portion of innovative niche players in a variety of industries that tend to stay private for a longer period of time. These companies can benefit from the growing size of private equity funds (which can therefore sponsor larger companies) and from the changing nature of private equity firms. Additionally, private equity houses have also developed solid in-house expertise that can accelerate the growth of the companies they invest in.
2020 in three words: Virus lock, goldilocks, gridlock
Lockdown hobby: Ping-pong and chess with my kids
Book recommendation: War on Peace by Ronan Farrow
What is the most promising area of alternative investments at the moment?
Gold is nor currently part of our portfolios. It is something we have discussed thoroughly and perhaps have not concluded the process yet. Gold is currently in a good position as a result of the expansion of central banks’ balance sheets. This means fiat currency debasement, but we are not sure that the answer to that debasement is gold. Do not forget that the main holders of gold are central banks, which are owned by governments with high debt ratios. As the gold standard is not in force, we cannot discard massive sales by central banks in the future.
We continue to be bearish on oil and energy prices. In the past, this view was based on supply reasons, the expansion of the production due to shale oil and gas, but now we start seeing signs on the demand side. In the short run, demand will increase thanks to the economic recovery and the expansion of emerging countries. Renewable types of energy will increase their share of the pie dramatically in the future.
We view real estate positively, especially within logistics and residential sectors, and avoid commercial real estate. We have to consider what will be the final impact of the digital disruption on offices. Offices were a 20th-century outcome of the first Industrial Revolution and its late technological developments.They resisted quite well the third Industrial Revolution, but they are losing their appeal during the fourth.
We would like to participate in in hedge funds. Successful active management will always exist. It is the power that makes financial markets fulfill their role: the optimal allocation of scarce resources that can be used alternatively. But we prefer to diversify the ‘asset manager risk’ by having some hedge fund managers or fund of hedge funds in our portfolios.
We would also like to include alternative assets and private equity to portfolios, while keeping in mind the liquidity problems these kinds of investments pose.
2020 in three words: The pandemic year
Lockdown hobby: Reading
Book recommendation: Thinking Fast and Slow by Daniel Kahneman, and Options, Futures, and Other Derivatives by John Hull
What is the most promising area of alternative investments at the moment?
We continue to find gold attractive. While gold lost some of its shine after the US presidential election and the news of a number of Covid-19 vaccines, the yellow metal retains its attractiveness in a world where real rates (nominal rates minus inflation rates) are negative and fiat currencies remain volatile.
We expect interest rates to remain very depressed for the foreseeable future as central banks continue to provide liquidity and easier financial conditions.
2020 in three words: Adaptation, resilience and innovation
Lockdown hobby: Running and hiking
Book recommendation: Factfulness by Hans Rosling; Prisoners of Geography by Tim Marshal; and Brief Answers to the Big Questions by Stephen Hawking
What is the most promising area of alternative investments at the moment?
Illiquid alternative investments is one of our key focus areas. Private assets are valuable complements to traditional liquid assets. Our primary focus is on private assets strategies, which have clear sustainability goals. These funds can make a positive impact on society at the same time as delivering interesting returns. We have a lot of experience in private equity, real estate and microfinance, which we combine with partnerships in private equity, debt and, in the future, infrastructure.
We have a broad approach covering several sub-asset classes, with both internal products and those developed with our partners. We place great emphasis on finding solutions that can be distributed to non-professional clients. We were one of the first Nordic countries to set up a European Long-Term Investment Fund with exposure to private debt through cooperation with Partners Group. We have also worked with Marathon in the same asset class, and within distressed credits.
We continue to launch funds in microfinance with our partner Symbiotics. This year’s fund was the eighth we have launched.
In terms of internally developed products, we have launched new funds in real estate and opened up our Forest fund for new investments. Our latest real estate fund is directed towards sustainable residential buildings in mid-sized cities and with an attractive rent.
Our private equity team has a strong track record in the industry. During 2020 we established our second directly investing fund with a Nordic focus, SEB PE Nordic Direct II, and set up a customised solution for SEB Private Banking in one of EQT’s funds. We are now in the process of setting up our second global partnership fund, in which we blend partnership investments and direct investments.
On the hedge fund side, we continue to offer a broad spectrum of multi-asset and single style hedge funds, both from our own fund management company and from external providers.
In 2021 we will work with an external party within infrastructure to offer all the main sub-asset classes within alternative investments. Our products in alternatives are becoming increasingly focused on sustainability.
2020 in three words: Covid-19, rollercoaster, client interaction
Lockdown hobby: Tennis and music
Book recommendation: Grand Union by Zadie Smith
What are the best and/or worst parts of your job?
The job of an investment strategist is satisfying for those like me who have an interest in the global economy, politics, technology, the corporate world and the financial markets. To be able to follow and think about the impact of long-term trends, changes in the business cycle, policy decisions and investor behaviour on the pricing of different asset classes is one of the best parts. Translating this analysis in a succinct way and presenting it to clients adds to this.
It is greatly satisfying knowing that our job helps clients understand the relationship between their portfolio and the global economy and financial markets. It helps them stay invested so they can reach their long-term financial goals.
At the same time, the difficulty in our job is that the short-term focus on performance can hamper the long-term focus of investment decisions. Communication is key in my role, which I like.
2020 in three words: An unprecedented year
Lockdown hobbies: Reading and entertaining the kids
Book recommendation: Superforecasting: The Art &Science of Prediction by Philip Tetlock and Dan Gardner
What are the best and/or worst parts of your job?
The best part of my job is definitely the never-ending process of understanding complex situations (financial, political, social, technological, epidemical) that we must translate into the best investment decisions possible. The pandemic-induced lockdowns combined with the markets’ meltdown and subsequent recovery resulted in some of the best investment decisions I have ever made while battling with my personal health. It will no doubt remain one of the most memorable moments of my career. This period proved to be testing for everyone, and I am extremely proud of how the investment team at SYZ pulled together, stayed strong and delivered during these challenging times.
One of the best parts of my job, and one of the main reasons behind the good investment decisions of the past four years, is our systematic investment process. I strongly believe that we should extract our own sentiment when making investment decisions and look at a set of indicators that give us an objective view of the market. Building these indicators is quite a fun activity, which requires investment experience and a strong capability for the modelisation of buy/sell signals, but the result is a powerful investment tool that proved very useful in March and April.
2020 in three words: Pandemic, resilience, family
Lockdown hobby: Building models with my kids
Podcast recommendation: 13 Minutes to the Moon from the BBC World Service.
What are the best and/or worst parts of your job?
By far the best part of my job is a great sense of purpose and ability to make a difference. Covid-19 has increased the awareness of how we are all part of one big ecosystem. The financial sector in general and asset management in particular have an essential role in directing capital in a way that supports creating a more sustainable world. Being majority owned by our customers Nykredit has a clear ambition to lead the charge regarding having a positive impact on the society around us. The sustainable agenda is therefore part of our DNA and a responsibility we take very seriously. In the wealth division, we live this ambition and make it real by working with our clients to make sustainable solutions and resolving the dilemmas that are inevitable in such a fast-changing marketplace. I am proud and honoured to work with highly competent colleagues and together find the right solutions to big challenges we are all facing. The less interesting side to Covid-19 is the negative impact on our employees who are having to work from home, isolated from other colleagues. While the virtual communication methods are working well, they can never replace meeting in person when it comes to solving complex challenges.
2020 in three words: Trump, sustainability, equities
Lockdown hobby: Painting our three-storey house with our four children!
Book recommendation: I have thoroughly enjoyed dusting off E-mail From the Soul by William Ayot, who I met at an Insead Advanced Management programme. While poems are often not easy to relate to in our line of business, William uses poems to describe leadership dilemmas that we have all faced during the Covid-19 pandemic.
What are the best and/or worst parts of your job?
I enjoy current affairs, and doing this through observing, reading and listening makes me better at my job. The challenges of my job are endless. Even having seen many cycles, each new cycle brings something new. The more effectively I interact with my partners, the better information I get, which helps me be more effective.
2020 in three words: It will end
Lockdown hobby: Helping my youngest daughter start her baking business
Podcast recommendation: Bloomberg Surveillance
2020 in three words: A hot mess
Lockdown hobby: My family and I have been busy fishing, hiking, swimming and enjoying the outdoors. Being locked down in Switzerland is not much of a punishment.
Book recommendation: Cows, Pigs, Wars and Witches: The Riddles of Culture by the Marvin Harris
What are the best and/or worst parts of your job?
I am very lucky to be looking at markets every day. Markets never cease to come up with something interesting. The worst part, of course, is that markets never sleep.
We are lucky to live in a time where so much can be done digitally and online. The investment discussions with colleagues around the world can take place just as effectively as before the pandemic. Some of it is even more efficient. For example, during investment meetings you can easily check data and charts on your terminal and use them in the discussion by sharing your screen.
Client contact is always more personal in a meeting room or in the client’s home, but the advantage of the digital world is that you can meet someone in Hong Kong in the morning and be in Dubai by lunchtime. I am starting to miss some of the travel, but my carbon footprint has definitely been reduced. I plan to travel much less than before Covid-19.
I particularly like the cross-asset part of the role, because different parts of the market often have a slightly different take on what is going on in the world, which I find fascinating. It is our role to guide clients through these different views and decide which are more likely to be right.
2020 in three words: Quality, sustainability, diversification
Lockdown hobby: Home cooking
Book recommendation: Economics for the Common Good by Jean Tirole
What are the most challenging areas to apply an ESG investment approach to, and why? And how are you dealing with this obstacle?
The most challenging areas in which to apply an ESG investment approach are asset classes where there isn’t any, or only very limited, ESG data available, such as in private equity and private debt markets.
Our approach is to focus on those areas where we as a sustainable bank and asset manager can make a difference by applying and integrating ESG factors, namely in liquid equities and in fixed income markets.
The key challenge in equities and fixed income is, in some way, the same as in private markets. It is in data availability and the data quality, particularly if you go beyond investing in developed markets. Data management is crucial in order to have the best ESG input into our sustainable investment tools, which we apply at every step of the investment process. There is no way around building your own ESG and also climate analysis engine. In order to manage climate risks appropriately, you need to translate publicly available information into key performance indicators that you can use in your day-to-day portfolio management activities.
Why are we making all these efforts in sustainable investing and going all the way to combine ESG factors and traditional financial data? We believe we can make better-informed decisions that lead to a better risk-adjusted return. We can generate better outcomes for our clients by integrating ESG factors wherever possible. Investing sustainably is both a great opportunity and the right thing to do.
