HONG KONG – In 2021, global investors had to navigate increased inflation expectations, geopolitical tensions, and the evolving COVID-19 landscape. These themes will likely remain as key issues that investors need to cope with in 2022. The Delta and Omicron COVID-19 variants have created more uncertainty to the global growth story, and investors now face the question of whether this will be a short-term hiccup or long-term disruption that will ultimately drag down economic activities. Such were the topics discussed at the recent Manulife Investment Management Asia Regional Investment Conference 2021.
This year’s Regional Investment Conference featured 11 sessions with 20 Manulife Investment Management expert speakers from Hong Kong, Shanghai, Singapore, London and Boston. The two-day virtual conference was attended by more than 1,500 unique registrants from 16 markets.
Luke Browne, Senior Portfolio Manager and Head of Asset Allocation, Multi-Asset Solutions Team Asia, Manulife Investment Management said, “Our roadmap for 2022 suggested a year of two halves. A long list of macro headwinds implies that the first half of 2022 looks like an extension of 2021: price pressures look as though they might decelerate but remain uncomfortably high, particularly in light of the emergence of the Omicron variant while global growth looks as though it could disappoint. This is a continuation of the stagflationary narrative that persisted in the second half of this year. However, prospects for the second half of 2022 look better as we expect inventory rebuilds and the unwinding of supply chain disruptions to fuel a more sustainable recovery than the ‘pent-up’ rebound of 2021. An improved growth picture and slower inflation is likely to bring us back to a Goldilocks regime which should be far better for market returns and general risk assets.”
Global Multi Asset: Eyes on the new variants and central banks
Despite the tapering of asset purchase programs and other forms of global monetary policy, central bank policy is likely to remain very accommodative with a measured and gentle guidance towards end-2022 rate hikes from the Federal Reserve at the earliest. In today’s environment, a multi-asset allocation approach that includes a mix of bonds and equities, as well as income generating option strategies are certainly a viable option for investors who look to create solid and stable income, while adding a defensive tilt to the portfolio during a period of market uncertainty.
John Addeo, Senior Portfolio Manager, Global Chief Investment Officer, Fixed Income, and primary portfolio manager of the Global Multi-Asset Diversified Income strategy, Manulife Investment Management said, “Our basic premises are that inflation is going to be ultimately transitory, but inflationary pressure can remain in place for longer than people have originally hoped. Underlying growth in the global economy is still below trend, and as such Central Banks will likely be cautious and thoughtful about how they first taper, before they contemplate raising rates as that could directly impact economic growth or increase equity market volatility dramatically.”
“We see opportunities in both emerging market credit and US high yield. US high yield will likely continue to be resilient in 2022 based on a solid US macro backdrop with low defaults. Spreads in emerging market credit relative to US high yield, though, are relatively attractive, representing a compelling opportunity. Particularly in shorter-duration, higher-quality markets in Asia, credit spreads can be 60 to 100 basis point cheaper relative to US high yield. The key is to carefully balance these opportunities with deep understanding of sector and markets and thorough research at the security level.”
REITs: A recovery year driven by structural trends and border re-opening
Over the past year, the Asia Pacific REITs market have grown significantly - markets like India and the Philippines listed their first REITs while new mergers and acquisitions in markets such as Singapore and Australia may present interesting opportunities. Despite COVID-19 related disruptions in 2021, there continues to be healthy transactions in the Asia commercial real estate market which have been supportive of capital values.
Hui Min Ng, AP REIT Specialist, Manulife Investment Management said, “While the latest COVID-19 variant may be clouding the short-term economic outlook, we believe a synchronized reopening within the region could provide further upside for the REITs, especially for retail, office and hospitality sectors. Compared to a year ago, governments now have more solutions to fight the pandemic, such as booster vaccine rollouts and effective anti-viral drugs. For instance, key markets like Singapore and Australia have achieved very high vaccination rates and are reopening borders from Q4 2021, while the Hong Kong SAR government is expected to relax border controls in 2022. In China, the most tightly controlled border, it is looking to reopen borders post the Winter Olympics in February 2022, which we believe is a sign there will be increasing confidence in travelling and resumption of cross-border business activities.”
“Dividend returns remain an important feature for REIT investments. We saw 2021 as a recovery year for dividends and this is expected to sustain going into 2022 as rent-free concessions end, occupancy rates improve, and full-year contributions from M&A activities in 2021 get reported. Regardless of the market environment, dividend returns have always been positive for Asia Pacific REITs. Over the past 10 years, dividend returns have made up nearly half the total of returns for Asia REITs. Even in 2020, when the impact of COVID-19 was the greatest, dividend returns for REITs were still positive. This was largely underpinned by office and industrial REITs, which continued to enjoy high rental rates.”
“Today, we have seen a continued discussion about inflation, and we have seen heightened volatility in share prices of REITs due to stagflation fears stemming from recent inflation data, high oil prices, and supply chain disruptions amid strong demand. However, central banks like the US Federal Reserve and the Reserve Bank of Australia have pushed back against market expectations of rate hikes in 2022. They focus more on employment data and wages. We believe as the low-rate environment continues, this will be supportive of real estate given the comfortable buffer income pick-up over the cost of borrowings. It has also helped REITs make accretive acquisitions as debt remained affordable.”
In the global REITs space, Joseph Marguy, Portfolio Manager, Global Real Estate, Manulife Investment Management said, “We continue to focus on individual REITs and respective sub-sectors that we believe will benefit from not only the economic recovery but also the long-term secular trends that should lead to above average growth and returns, such as the evolution of technology within real estate and the global aging population. The digitization of global economies in the 21st Century, combined with the everlasting need for healthcare, should provide enduring demand for selected REITs that are immersed in these trends. Since 2019, we have refocused on the structural growth trend in industrial REITs which focused on logistics warehousing and data center REITs that would benefit from 5G developments. This move could pay off in the post-COVID-19 era as both sectors are now perceived as beneficiaries of the ongoing digitalization of economies.”
“In an environment where uncertainty can occur as we continue to manage through the pandemic, we are optimistic that the worst is behind us and that a sustainable economic recovery will continue in 2022. With REITs, income has been a bedrock of total return over the course of history. As conditions stabilized in 2020, we began to see a resumption of dividend growth within the sector. Our expectation for the coming year is a continuation of above average dividend growth as economic conditions improve. In this low interest rate environment, global REITs remain an attractive option for income-oriented investors. Global REITs also enable investors to capitalize on the economic recovery as well as long-term trends such as the continued growth in technology and the aging global population, which we believe will provide opportunities for capital appreciation.”
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