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Editorial Board Insights: Simon Godfrey 2023

In our first edition of Editorial Board Insights, Fund Selector Asia caught up with Simon Godfrey, head of advisory at Prive Technologies, to discuss investment strategies for 2023.
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Watch the full interview below

Interview transcript

How should we make sense of this year’s volatility?

Simon: This year has started on quite a tumultuous note. While statistically there’s more evidence of volatility in government bonds than in equity markets, the latter are being whipsawed by sentiment due to macro and geopolitical uncertainty following last year’s sell-off in consumer discretionary and technology stocks.

There has been some respite earlier in the year with investors choosing to take a long-term view on prospects for long duration names and that’s been helped by relaxation in bond yields and also more recently a majority of companies, especially tech companies, beating expectations in the earnings season.

Inflation data though continues to be mixed and this weighs on sentiment for those wishing to see an early pivot from the Federal Reserve. And the political climate in the US is now heating up with the debt ceiling debate and next year’s presidential elections coming up.

So, as anticipated, the consequences of the rapid increase in interest rates by the Fed are starting to be seen in places like commercial real estate or in the banking sector now and this is still very much in focus and time will tell where it’s going to lead.

And then lastly, geopolitics continues to cast a shadow on markets and notably the ongoing conflict in Ukraine. So in conclusion it does seem that there is potential for these issues to create more volatility going forwards this year.

Where does China fit into 2023 investment strategies?

Simon: China is showing a strong recovery, having opened up later from the pandemic than other areas. And while focus has slipped away from China and Asia in recent years due to the strong outperformance of the US technology sector, it would be worthwhile now for investors to pay more attention to the potential of the region, which is at quite undemanding valuations.

From a historical perspective, China continues to develop economically at a rapid pace and its stability is a welcome respite to continued upheaval elsewhere in the world, providing some sector diversification as well. Domestic consumption will remain the area of most potential as incomes continue to rise in urban areas. But notwithstanding that, risks remain from the unwinding of property market excesses and over the long term from deteriorating demographic trends.

Does ESG remain as relevant despite a difficult past 18 months?

Simon: ESG, of course it’s relevant. We could spend a whole day, a whole week talking about this. I think sustainability is the other transformation that financial services firms need to plan for strategically and implement as a necessity. ESG version 1.0 may have run its course due to the lack of data or the deep knowledge, which is required for it within financial services firms as well as on the marketing side as well.

So ESG is not a quick win, it’s not a one way street, so it requires a lot of commitment to ensure that everybody in the organisation understands the complexity of it. But also their ESG factors can affect the near-term and long-term prospects for companies as well as the economy as a whole. And a lot of the data which is necessary to implement ESG strategies has not really been there.

So I think necessity being the mother of invention, a lot of firms around the world are working to get data sets together to really tackle and measure ESG issues so that they can be used by portfolio managers and technology is probably going to play a large part of that.

On the other hand, we have the marketing of ESG strategies, which needs to take into account not only how investment firms are implementing ESG policies, but also what that means to their clients and whether those investment solutions are adapted to their clients’ needs and their clients’ values and what they think is our material ESG risks.

I think lastly, the regulators have also found out to their detriment that the multidimensionality of ESG sometimes doesn’t really fit into the very rigid frameworks that they’ve set up. So I think ESG 2.0 will remain very relevant for financial markets going forward.

Is fixed income back and what does this mean for investors in Asia?

Simon: Fixed income never really left in Asia. I think it’s long been a mainstay of investor portfolios as a source of yield due to the collapse of interest paid on bank deposits. Fixed income is definitely now an asset class offering better risk-reward than it has in the past. And following years of near-zero interest rates, investors can now get competitive yields without having to go further up the risk curve in order to supplement their dividend income.

They can also get diversification from equities following the exceptional re-correlation event you had last year and over the long term there should be a much more normal relationship between equities and fixed income. However, in the short term I think investors could be quite well advised to reduce their credit risk in the light of recessionary fears and also to keep duration risk to a minimum as the Federal Reserve seems still to be in tightening mode.

What role will alternatives play within a portfolio?

Simon: For more sophisticated retail investors, alternatives can be an important source of returns where traditional asset classes might not be as profitable as they have been in the past. So in terms of diversifying risk they can also be useful, but as long as investors are able to take a long-term view. Five to seven years absolute minimum.

Alternative asset classes do have important differences around price behaviour and liquidity and that can make them unsuitable for less well-educated investors. In terms of returns, opportunities in private equity and private debt would probably be the most profitable over the long term. And there are also hedge fund strategies such as long-short equity, global macro or CTA, for example, and that can help mitigate risks to equity and fixed income markets in the short term and improve portfolio efficiency.

I think access to alternatives is certainly a theme for the democratisation of financial services and with the right amount of education and with the product design which has adapted to private client segments, alternatives are able to add value to individual portfolios.

We’re also likely to see the evolution of private markets, which will help make alternatives more suitable for retail investors and then give access to alternatives in the way institutions have had for many decades.

Part of the Mark Allen Group.