The 'counterbalance to low yield'

Blackrock is putting infrastructure and real estate at the forefront of investors’ minds, but structural reforms are needed.

Although alternatives – encompassing liquid hedge funds, credit assets, all the way to the illiquid assets of private equity, real estate and infrastructure – have traditionally occupied a humble share of investors’ portfolios, they seem bound to become more popular. Not least, treasurers and chief financial officers are actively seeking ways to generate yield from portfolios which have not been performing as well as they once did, according to asset manager, Blackrock.

Increasing interest from institutional investors in alternatives to counter-balance low yields from traditional sources is given added urgency by growing liabilities due to work forces declining considerably and growing gaps between ageing populations and slumping birth rates – specifically in countries like Korea, where the ratio of active population versus pensioners is now 1.5 to 1 versus 13.5 to 1 in 1970.

“The monetary stimulus that we have seen combined with market appreciation has grown the asset management industry into a growth dynamic but this is a growth dynamic driven from this abundant liquidity and from the fact that tons of money sitting in the banks at zero rate means that there’s a fungibility between the banks' deposits and money coming into the industry. But we shouldn’t be complacent about it because as economies grow we will see the dynamic shifting,” warned BlackRock Alternative Investors chairman Mark McCombe.

McCombe, speaking in Hong Kong, was drawing attention to the ideal features of infrastructure assets in terms of compensating the low-yield environment we are in, but stressed the need for governments to work harder to create the right environment for investors to increase allocations to the asset class, as well as the need for investors to take a step back and not sit in risk-averse positions.

“It ticks all the boxes, in terms of patient capital and being socially good, but returns have been disappointing, with capital having sat on the side lines,” McCombe said about the asset class.

Blackrock’s conversations with its clients on infrastructure in Asia often end up with a limited outcome, mostly due to the importance of perceived political risk and apprehension about impracticable or unfriendly regulatory frameworks.

In another conference held by the asset manager on the same day, which focused on emerging economies’ outlook, the challenge for the likes of China to avoid the middle income trap was stressed, while Korea and Taiwan were hailed as having succeeded at the task. China was given credit for having made significant progress on structural reforms underpinning macroeconomic performance. One of these was the sustained effort to develop its infrastructure.

Helen Zhu, Blackrock’s Head of China equities, stressed the steady progress that the Chinese government has been making in terms of delivering structural and institutional reforms necessary for the country’s shift to a less export-driven economy, as well as for the equally important mind shift in investor psychology.

“China has made reasonable strides in that sense. What we’ve seen over the last 10 years in China has been reforms of the SOEs (state-owned enterprises) and housing reforms. The latter part of the last decade, there’s been more focus on growth, stabilizing growth, and now we’re moving to another era which is fundamentally addressing structural problems,” she said.

“That’s going to be incredibly important in terms of asset class performance basically because people recognize that high growth is not high quality or it’s a signal that it’s not something that the market wants to reward.”

Other than anti-corruption and government administration, which have featured prominently in the media, there have been significant advances in financial, fiscal and tax reforms which are underlying factors for economic shifts. The importance of these reforms were judged fundamental for emerging economies in the context of the global connectedness of economies.

Zhu explained further: “When we look at net exports, we’re down to lower single digits now versus closer to higher single digits previously, so China is still very much reliant on global growth but probably the overall GDP growth in correlation to global GDP growth should be lower today compared to 10 years ago. Where I think people are a little bit dissatisfied is that in the domestic demand piece there hasn’t been a very meaningful shift from the investment side over to the consumption side so far. I think that shift will happen over time, I think it will be a gradual process.”

According to Zhu, there are a number of factors that need to fall into place which will take time. She also sees a shift in the composition of investment.

“For example, property will probably make less of a contribution in the next five years versus the previous five years. Perhaps infrastructure will make a greater contribution but will maybe move away from highways on the Eastern Seaboard more towards areas which were previously underinvested, be it railroads and subways, environmental projects, water projects, social housing. I think the progress on that front in terms of exports versus domestic has been pretty strong.”