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Navigating through rate hikes

Asset managers shared their thoughts on how to position themselves amid higher inflation and slower global growth at the recent FSA Spotlight On: Equities event.
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The US Federal Reserve has announced a 0.5% interest rate hike, the highest increase in more than 20 years, in an attempt to tame inflation.

Partly accelerated by Russia’s invasion of Ukraine, the US consumer price index shot up 8.5% in March, fuelling investors’ worries of higher inflation and slower global growth.

“The main driver of the Fed rate hike is US inflation, which is at a 40-year-high. It makes sense for us to reduce interest rate sensitivity in our portfolio in both fixed income and equity,” Kieran Caider, head of equity research for Asia at Union Bancaire Privee, told delegates at the FSA Spotlight On: Equities event, hosted in Hong Kong last week.

“On equities, we have been trying to get out of some of the high growth equity names that are more exposed to rising interest rates. We would like to focus on high quality and high visibility.”

Against the backdrop of slower earnings growth, Louis Shen, senior portfolio manager at Nomura, believes this is the time to reduce allocation to the technology sector.

“We reduced our tech weighting at the beginning of this year. Although we still like the sector on a multi-year view, we feel that the short-term risk-reward does not make much sense.”

“To guard against inflation, we are moving into inflation hedge types of sector, such as consumer staples and companies with good fundamentals, as well as Reits.”

Shen noted that Reits had a difficult time when the equity market was performing well, but they will become well supported as volatility in the market continues.

Their views were echoed by Bertrand Lecourt, senior fund manager and head of thematic investments strategies at J O Hambro Capital Management, who also believes there is a big shift to mitigate risk from inflationary pressure.

“Earlier this year, there was money going out of the technology sector and moving into the banks and the energy sector. We think that is a short-term rotation and we are looking into allocating to more long-term opportunities,” said Lecourt.

“There is a bigger systematic shift underway, and the traditional allocation that focuses on geography and sector is changing. The two big drivers in the coming years are sustainability and thematic.”


When asked about the influence of inflationary fears and other macro dynamics on the appetite for thematic and sustainability, David Smith, senior investment director, Asian equities at abrdn, said that the key is to identify resilient and sustainable winners.

“The challenge has been that a lot of ESG funds have been tilted towards growth, which means they have been hurt by some of the gyrations over the last quarter; but ESG, sustainability and thematic is a fairly broad church,” Smith said.

“What’s important when running a thematic or sustainable portfolio, is that you should have different exposures, so you have the ability to allocate to different thematics to diversify better as valuations move around.”

He also believes the demand for sustainable and thematic investment is driven structurally, rather than cyclically, which should ensure resilience as investors worry over short-term inflation.

Adeline Tan, wealth business leader at Mercer, noted that while ESG investment does not promise guaranteed returns, it is essential for investors to actively engage with asset managers to manage long term risks.

“We find that the high quality managers continue to see this as an area that they can research more and generate better returns, as they identify companies that are capturing momentum and trends in the market.”

“We have seen some large clients of ours hire sustainability investment experts so they can ask their asset managers what sustainable investment means for their portfolio and how they manage long term ESG risks.”

To access the full On-Demand version of the SpotlightOn: Equities panel discussion, please access the following link:

SpotlightOn: Equities event On-Demand

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