Posted inAlternatives

Time to diversify into alternatives

This year presents a great opportunity to diversify across public and private markets, writes Jessica Jones, head of Asia at PGIM Investments.

The markets rebounded in 2023 as central banks signaled the end of the interest rate tightening cycle, yet heightened geopolitical risks are adding uncertainty to the outlook. As investors navigate the macro challenges and leverage on the recovery to come, 2024 will be a year for diversifying across public and private markets with an active investment strategy.

The Asia wealth management industry is growing faster than any other regions globally, and the trend is expected to continue through 2025 and beyond. However, the portfolios of Asian investors are not diversified enough – either sitting on cash and risk missing out the potential for higher returns, or holding predominately traditional bonds and equities that are sensitive to macro headwinds and market volatility. The growing pool of capital coupled with investors’ rising interest in alternatives present a significant market opportunity.

Bonds are back

With interest rate hikes over for this cycle, investors who have been underweight fixed income for a considerable period are making cautious moves back into the asset class, primarily through higher-quality investment grade securities and income-orientated funds.

Yields are back up at respectable levels and are expected to stay roughly around current levels for the long run, which should allow bonds to earn their yield in the years ahead. And with fixed income entering a new bull market, investors are expected to increase allocations to high-yield credit, multi-sector credit and emerging market debt this year.

Once central banks across the globe start cutting rates, investors will likely pare back on stocks and cash holdings and shift into bonds, leading to a fall in yields. Those who fail to lock in higher rates now may end up losing out in the long run.

Tailwind for global growth stocks

As the macro environment stabilizes, fundamentals are coming back into focus. We see tailwinds for growth stocks as investor confidence returns this year. Valuations have significantly compressed from Covid highs, and even after the strong rally in 2023, remain near the long-term average. Earnings growth estimates favour growth stocks over value stocks in 2024, which creates strong alpha opportunities for experienced bottom-up stock selectors.

Major transformative changes are afoot globally in areas with resilient demand and growth that do not rely on the economic environment. Opportunities lie in companies positioned to capitalize on strong structural growth themes, for instance, secular growth leaders in advanced technology (AI and cloud computing), global consumer (luxury), electric vehicles, healthcare innovation, fintech and industrial automation.

In an uncertain market environment, investors should look beyond traditional strategies and broaden their source of returns into alternatives. This will ensure additional diversification and downside protection during periods of market volatility or financial crises when equities and bonds are both down.

A $1.5trn opportunity in private alternatives

The global alternatives market is expected to reach $24.5trn by 2028, representing a $8trn surge in the next five years [according to Preqin, Future of Alternatives: 2028; October 2023]. The democratization of private markets in recent years is driving the sector’s exceptional growth. Traditionally dominated by institutional capital and under allocated by individual investors, alternatives are become increasingly accessible to private wealth investors today.

In fact, there is a $1.5trn opportunity in alternatives for high-net-worth investors. Today, individual investors hold roughly 50% of the estimated $285trn of global AUM, yet those same investors represent just 16% of AUM held by alternative investment funds. In Asia, high net worth investors currently allocate low single digits to private markets, but some private bank CIOs and advisers are suggesting that will grow to 15% to 30% allocations, depending on the risk tolerance of the investors.  

Real estate and data centres

In the alternatives space, real estate and digital infrastructure look attractive. The Asia Pacific real estate market is set to begin its recovery in 2024 after a period of great reset, thanks to resilient income returns and stabilized capital values. Long-term structural trends such as digitalization, demographics and decarbonization are creating compelling opportunities.

Data centres is one of the themes increasingly gaining traction among Asian high net worth investors. Digitalization and the growth of generative AI are driving demand and opportunities in digital infrastructure such as data centres. Rental prospects of data centres remain robust against the favorable fundamentals of solid demand and limited supply especially in markets like Tokyo, Seoul, Singapore and major Australian cities.

This presents a generational growth opportunity, and we expect data centres to become a mainstream investment in the next 10 years. Traditionally a sector with higher entry barriers for individual investors, it can now be accessed via REITs or dedicated private investment strategies.

Navigating risks

Looking ahead, the uncertain economic outlook, slower growth and rising geopolitical risks especially in an election year will no doubt continue to bring market volatility. As portfolio construction has become more challenging with equity/bond correlations remaining significantly positive, an actively-managed strategy with true diversification across asset classes and geographies would be key in navigating the uncertainty.

While public markets are vulnerable to short-term market noise with prices often overshooting to the downside based on shifting investor sentiment, private markets benefit from a longer-term view and less frequent mark to market, often providing investors a smoother ride.

By Jessica Jones, head of Asia at PGIM Investments

Part of the Mark Allen Group.