Climate change: a sustainable investing megatrend
We discuss five megatrends related to climate change and the investment implications.
Amid the festivities
It is customary in Hong Kong and Singapore to serve ‘pun choi’, or a prosperity pot, when families and friends gather to celebrate the Lunar New Year3. The dish comprises multiple layers of seafood, meats and vegetables, and is slow-cooked over time.
And like a ‘prosperity pot’, investors, depending on their investment objectives and risk appetite, could consider a wider variety of income sources in an investment portfolio1.
Seeking diversification in a portfolio for robust income potential has become increasingly important especially as the Fed is expected to raise interest rates this year4.
Broadening income sources
Symbolising unity and good fortune, the aim of a ‘prosperity pot’ is to tap into a wide variety of quality ingredients in the casserole, such as abalone, which can be sourced from South Africa, dried scallops from Japan or pork belly from Spain, just to name a few options. And the dish can become more flavourful, or sometimes complex, deeper inside the casserole3.
Searching for income could be likened to seeking quality ingredients for this Lunar New Year dish, investors could consider traditional and non-traditional sources within a single asset class, or multiple asset classes across different regions, markets and sectors.
Investing across a broader spectrum of asset classes in the overall portfolio1 could help capture income opportunities and manage risks, as some asset classes could have a relatively lower correlation against the others in changing market conditions, and could generate different returns, as illustrated in the chart below5.
Asset class returns in a high-inflation environment5
Opportunities we see across regions, sectors and asset classes1
|Multi-income strategy||Fixed-income strategy|
|Key sources of income||Tapping into low or negatively correlated opportunities across asset classes||Going across sectors within a single asset class. Additionally, the global bond market size is currently about US$136 trillion6.|
|Equities||Equity income or dividends from equities among quality corporates in the US, Europe and Asia.|
|Fixed income||Government bonds. As the movement of interest rates can have significant impact on a fixed income portfolio, we strive to manage these risks by adjusting duration7. For example, we are modestly underweight duration7 to manage the risk of rising yields.
Investment-grade credit. As markets continue their vaccination rollouts and business activity further rebounds, companies should have registered a gradual strengthening in corporate balance sheets.
Different bonds react differently to market changes. For example, US high-yield (HY) corporate bonds8 tend to perform better in periods of rising rates. Quality HY bonds8 in the US and Europe present compelling income opportunities as corporate earnings are rebounding as the global economy improves and consumption recovers.
We believe strong US consumer and housing market fundamentals could bode well for securitsed assets9 such as asset-backed securities and mortgage-backed securities.
|Hybrids||Hybrid securities from convertibles and preferred equities, which are generally higher in the capital structure and are supported by strong fundamentals in financials and robust capitalisation of banks.
Global real estate investment trusts and infrastructure equity.
Being active in an overall portfolio1
Active management, which integrates macro views and the bottom-up, yield-focused insights of asset class specialists, remains key when seeking out quality income opportunities over the long term.
Within fixed income, we have preferred low-duration, high-carry credit such as HY bonds8 where we continue to see support from the fundamental perspective. For multi-asset solutions, we are able to exploit market dislocations, seeking opportunities for sustainable yield in the current market environment by shifting tactically across asset classes and regions.
In a fast-changing market environment, we believe that being diversified and tapping into relatively attractive income opportunities with active management approach will continue to be crucial.