Attractive yields in the ‘lower for longer’ environment to remain at core of investment in 2018

The search for attractive yields in the ‘lower for longer’ environment is likely to remain at the core of investment decision making in 2018, according to Suni Harford, head of investments at UBS AM, in UBS Asset Management’s 'Panorama: Investing in 2018' report launched last week (23 November).

The report covers opportunities and downside risks across asset classes in the year ahead and notes that the asset management industry is changing quickly. Technology and regulation are driving much of the change, but the market environment and the sheer scale of the challenges facing investors will likely increase in intensity in 2018.

‘Against this backdrop, our clients face increasingly complex and acute challenges to build genuinely diversified portfolios capable of delivering growth and income efficiently,’ Harford added. ‘Encouragingly, our teams have a high level of conviction that attractive opportunities still exist on a risk-adjusted basis across both traditional and alternative asset classes,’ she said.

In the real estate sector, income rather than capital growth is likely to be key going forward and as investors look for new drivers to power investment strategies, the spotlight is falling on megatrends such as demographics and environmental change, according to the report.

The real estate investment cycle has turned. After a period of exceptional capital value growth around the world, driven heavily by ultra-low interest rates and capitalization rate compression, we are shifting to a period of income-driven total returns. As the report points out, this is more in line with real estate’s historical behaviour. Besides, income returns do not vary across markets and sectors nearly as much as capital value growth, meaning top down strategic picks have become more difficult, so investors and strategists are now looking for drivers on which to pin their strategies for outperformance.

As such, mega trends will influence greatly what kind of real estate is needed and where, the report says. Environmental factors are being rapidly embraced with respect to what is needed at the asset level, less so as to which areas will be investable in future.

‘With respect to the ageing of the population, we are much earlier in the adoption curve: the challenge is readily understood but we are not yet incorporating it into asset design or location. For investment managers looking to outperform in an era of less capital value growth and lower returns, these might be areas in which to excel,’ the report suggests.

Investors searching for income in 2018 face a difficult choice between re-adjusting income requirements and accepting a higher degree of risk. As no single asset class offers a panacea for the challenges they face, investors are increasingly seeking bespoke solutions across asset classes.

‘With the challenge of delivering attractive risk adjusted income becoming more acute, we see more diversified income strategies and tailored incomes solutions coming into focus,’ said Luke Browne, head of investment solutions investment specialists, at UBS AM.

For investors looking to diversify into a broad spectrum of assets, emerging market equities, which began their recovery in 2016, are forecast to grow their earnings by more than 20% next year, which would mark the strongest pace of earnings growth since 2010, according to the report.

‘We believe the upcycle for EM will continue over the next few years. Continued improvement in corporate earnings and profitability, an improving economic backdrop and a transition in the fundamental forces driving EM should prove to be drivers of the asset class in the mid-term,’ said Geoffrey Wong, head of global emerging markets equities at UBS AM.

Another asset class gaining traction is alternative beta indices. UBS AM estimates that currently over $450b of assets globally are tracking alternative beta indices, with FTSE Russell’s latest annual survey indicating that 71% of asset owners worldwide have implemented or are evaluating alternative beta.