Ms Lena Teoh, chief investment officer at Prudential Singapore, discusses her outlook on investing opportunities and how markets have changed since the Asian financial crisis, in the latest in our series featuring fund managers and leading market experts.
Ms Teoh, who has more than 25 years of financial industry experience in the areas of corporate banking, investment banking and asset management, leads the Prudential Singapore investment team in developing and implementing long-term strategies.
Q 2017 marks the 20th anniversary of the Asian financial crisis. How has Asia's investment landscape changed since?
A The year 1997 was a humbling period for Asia, as governments, banks and corporates were chastised for having excessive leverage and poor economic fundamentals. As a rookie fund manager of Asian fixed-income securities back then, I recall being caught in the turmoil.
But despite the tremendous stress and trepidation, it was a truly insightful and enriching experience. Since then, fiscal and current account positions of countries have improved dramatically and foreign exchange reserves have expanded significantly over the past 20 years.
Many Asian currencies have also moved away from being US dollar-pegged towards free-floating regimes. This allows central banks to more easily implement monetary policies to support economic growth and rein in inflation, which used to hover at double-digit highs prior to the crisis.
The past two decades have also seen China increasing her political and economic influence, as reflected by her growing presence in domestic bond and equity markets. Notably, China's equity weight in the MSCI Asia Ex-Japan index was a mere 1 per cent two decades ago, versus 29 per cent today.
This is in contrast to Singapore's equity weight in the index, which shrank from 13 per cent to 4 per cent over the same period.
Q How has your experience of going through several financial crises (Asia, dot.com bubble, global financial crisis) impacted your views on investments?
A Going through several financial "maelstroms" has provided me invaluable insights and fuelled my passion for a career in the investment industry.
Looking back, each crisis appears to have a similar underlying narrative - one that is characterised by highly leveraged economies and over-inflated asset prices, driven by investors' euphoria.
It is important to avoid the major market corrections and exit when valuations seem irrationally exuberant and are no longer supported by fundamentals. Having said that, it is challenging for investors to try and time the markets. The key to investment success is to adopt a longer-term investment horizon and to make sure you have the financial ability to ride through market cycles.
I have learnt two important lessons in my years of investing - never love a stock to death and every dog has its day.
Q With global markets continuing to hit new highs, do you have any concerns that the next crash is just around the corner?
A Rich stock valuations alone do not lead to a major market correction unless that coincides with key events, such as a severe recession or a big shift in the global political landscape or a policy mistake by the major central banks.
Based on a personally developed crisis indicator, I do not see an immediate risk of a crisis, with global growth having just broken out of a seven-year decline. We have seen, for the first time since 2010, positive earnings upgrades that could support current equity valuations.
Also, any major rise in interest rates will still be capped by inflation, which remains persistently low in the developed world and in emerging markets, although there could be some increase in the US on tighter labour markets.
Q Are there any markets and asset classes that you feel are overpriced?
A On a medium-term basis, developed world government bonds such as German EUR Bunds, Swiss CHF bonds and JPY bonds are viewed as expensive along with high-quality long-term AA-to AAA-rated bonds.
Bond yields remain persistently low as chances of a US fiscal stimulus taking place this year continue to fade on the back of low inflation due to demographics, weak productivity, low wage growth and structural issues. That said, inflation could potentially emerge as a key risk next year, and yields may rise alongside rising wage costs, with bonds subjected to greater volatility down the road.
Q In which markets and asset classes do you see significant potential?
A Comparing assets, we prefer equities over bonds because the former offers more attractive earnings yields and risk premiums. Notably, total return on equity of corporate stocks should provide superior returns, especially when dividend yields are higher than that of their corresponding bonds.
Hence, our recommended asset allocation based on a calculated investment risk is skewed towards equities, with a slight preference for the US - notwithstanding valuations where earnings growth continues to improve in tandem with economic recovery and the prospect of future tax cuts to boost business and consumer spending.
We also like Asia ex-Japan due to the region's leverage to global growth and favourable valuation metrics. Other assets we are inclined towards include Asian and emerging market credits in USD for their carry, as well as selective high yields on the back of improving issuers' balance sheets. For the USD, potential strength in the currency may see some volatility in emerging markets but its fundamentals should ultimately prevail.
Q What is your advice to an investor planning a long-term portfolio that can weather the ups and downs of market cycles?
A Having been involved in strategic asset allocation for institutions and high-net-worth clients, what concerns individuals most is their ability to cover the rising costs of living, including healthcare and asset prices.
In a developed economy such as Singapore, future long-term returns from domestic bonds and equities are expected to be lower than in the 1990s and are likely to stay in the low single-digits.
Hence, my advice would be to have a long-term, multi-asset portfolio that is globally diversified. As a rule of thumb, an investor should seek to have a good mix of global government, corporate and emerging market bonds, along with investments in equities that provide geographical diversity across developed, Asian and emerging markets.
Last but not least, where possible, it bodes well to have some allocation catered to alternative investments for diversification such as private equity, real estate and infrastructure.
However, due to its niche nature, such investments would entail the need of investment advice from specialists who are well-versed in the workings of such illiquid assets.
Q From an insurance perspective, with a protection gap in Singapore, how can Singaporeans use investment-linked insurance policies (ILPs) as a way to meet their financial objectives?
A It would be meaningful to view ILPs as a protection solution with an investment element that can potentially boost the cash value of the plan.
As many ILPs are regular premium plans, they may be used as a systematic way of investing in certain asset classes depending on the underlying funds through market volatility by way of dollar-cost averaging. ILPs are also an affordable option for those with a tighter budget but would like to start a financial plan that protects them against life crises and gives them the opportunity to build wealth for the long term.
We recommend those interested in ILPs to take a long-term view of their investments, and seek to build a balanced and globally diversified portfolio that can better withstand the peaks and troughs of economic cycles.
Q What do you see as the strategy of the future? Any interesting investment trends ahead?
A We need to be aware of the emerging trends that will influence tomorrow's world, such as an ageing population, robotics, automation, digitalisation and disruption by fintechs. These pervasive trends are impacting the way businesses are run and decisions are made by policymakers. As an investor, one needs to think about how to invest in sectors and companies that benefit from such trends.
An area of investment that is gaining traction among global institutional investors is environment social governance (ESG)-based investing. This is in line with growing affluence and a greater call to be socially responsible, especially among investors in the developed countries.
In this regard, Prudential is actively exploring this space and evaluating ESG-related investment frameworks to provide sustainable investment solutions that take the long-term impact on society into account.