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Deep waves Digital ecosystem

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BUILDING NEW MARKETS

With the UN predicting continued massive population growth in Asia, green bonds could help secure a long-term sustainable infrastructure for all [1].

Key takeaways:

![image-amundi.jpg](/uploads/image_amundi_260e00b843.jpg)

Asia’s fast-growing economies, which are increasingly focused on renewable energy sources and sustainable infrastructure, could be fuelled by the rise of ESG investing, according to Albert Tse, CEO South Asia at Amundi. ‘South Korea and Japan have pledged net-zero emissions by 2050, while China has committed to carbon neutrality by 2060. But it is not just an increasing climate awareness and the desire for better environmental quality that is fuelling ESG mentality’, Tse said. The vast trend of urbanisation is also playing a part. To put this in perspective, Asia is expected to be one of the biggest sources of urban population growth over the coming years: the UN predicts that by 2050 India will have added another 416 million urban dwellers, while China will have added 255 million. [1] ‘Asia is facing a huge demand for new buildings as more and more of its population move from rural areas to the cities, Tse said. He cites the case of a real estate builder in Vietnam who needed to issue debt to finance the creation of a new building. ‘He could either have issued a conventional bond or a green bond. The advantage of the green bond is that the finished building will be expected to have a much greener profile, with better insulation and lower energy costs. So, the added value of the building may be greater than a conventional one in 10 years’ time,’ he said. Drawn from a real encounter, we believe this example brings home the fact that someone investing in a project financed through green bonds effectively takes a more holistic stance that the value of the finished project may be higher because of the intrinsic green component, Tse said. ‘This is particularly relevant as Asian economies start to re-open and governments prioritise re-building in the wake of the pandemic,’ he said. At the same time, the Covid-19 pandemic has resulted in profound social consequences through the region: in particular, disruption to education, employment crises and the impact on healthcare systems have all increased social inequality which may well have lasting effects. ‘It has been difficult to find ways to invest in this field, and that is why we launched an innovative solution in late 2020. Our social bond strategy seeks to promote the financing of social projects to address these areas and we hope it will follow what we consider to be the success of our social thematic strategies,’ he says. Bonds dedicated to social projects present particular challenges, because many such projects are by nature small scale, often at the level of microfinance: for example, a scheme to help people in a particular locality. And this requires particular investment capabilities, Tse points out. ‘It is possible that in the wake of the pandemic, we may see companies investing in bigger projects on the social side, because of the greater inequality that will be evident throughout the region. We could, for example, see larger scale initiatives within education. But at present most of the projects remain small in scale. This is where Amundi’s size and experience enables the company to channel money secured from its international investors to provide finance for smaller projects that have the potential to have a real impact.’ 

## *Asia is facing a huge demand for new buildings as more and more of its population move from rural areas to the cities*

Sources: 
[1] United Nations ‘Around 2.5 billion more people will be living in cities by 2050, projects new UN report’

IMPORTANT INFORMATION Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 30 May 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability.

Date of first use: 30 May 2022









Why Asia’s green economy is growing fast

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It can be a challenge for investors just getting started to learn how to tackle debt, start saving, or find the best ways to pay off loans. Compounded by the coronavirus pandemic, addressing your financial situation can seem even more daunting when trying to learn the basics. 

We surveyed some of Morningstar's[ Generation Z and millennial employees ](https://www.morningstar.ca/ca/news/202904/generation-z-has-the-right-attitude.aspx)to hear their thoughts around money. Here are five lessons they learnt: 


**1. Paying Down Student Loans**

At the start of the pandemic, [the Government announced](lhttps://www.canada.ca/en/services/benefits/education/student-aid/notice-covid-19.html) measures to help students, including payment freezes.

There are pros and cons to continuing payments, and many good ways to make use of the money, like creating or building an emergency fund. If you contributed to your loans anyway, you reduced your principal. Paying down student loans is typically approached in one of two ways: [the snowball method and the avalanche method](https://www.morningstar.ca/ca/news/206124/how-to-paydown-debt.aspx). The snowball method prioritizes paying off the smallest loans first, while the avalanche method focuses on paying off the loan, no matter its size, with the highest interest rate first.

Here's how one employee took advantage of the grace period:

"As the pandemic happened and the government decided to set student loan interest rates to zero, I prioritized paying off as much as I could each month. I felt that I should try to pay the principal down since I will not have any interest eating away at my overall bill."


**2. Tackling Credit Card Debt**

With fewer ways to spend, some may turn their attention to paying down debt.

When approaching any kind of debt, you may be asking yourself the same question: Where do I even begin? Morningstar's director of personal finance Christine Benz recommends taking these steps first:

1) Buy yourself some time. Does your bank offer any options to extend a grace period or reduce your interest rate?

2) Make a list. How much do you owe, who do you owe, how much time you have, and what are the interest rates?

3) Pick a strategy. Do you want to go with the snowball method or the avalanche method

Here's a takeaway from one employee who focused on credit card debt:

"It's given me a new respect for that feeling of 'getting ahead' on payments. It's given me a chance to think more about my long-term savings goals--when I was so caught up in day-to-day spending, I didn't think as much about what I should be saving that money for instead." 


**3. Creating and Maintaining an [Emergency Fund](https://www.morningstar.ca/ca/news/206579/morningstar-money-challenge-day-7.aspx)**

The pandemic helped highlight the need to be financially prepared for the unexpected.

Our investment specialists recommend these tips to get a solid footing in the event of any unforeseen circumstances:

1) Tally up your monthly living expenses, from rent to groceries. Leave out the nonessential purchases.

2) Multiply these costs by three months. This is the minimum amount you should try to squirrel away.

3) See how much you currently have and set a savings goal.

During this time, many readjusted their focus to their emergency funds. Here's what one employee realized during this time:

"I believe that having a more holistic approach to budgeting is essential. Pre-pandemic, I was only focused on one aspect of my financial plan: paying off debt. Since the pandemic, I realized the importance of building up my emergency fund and having a backup plan in case of an unexpected occurrence." 


**4. Increasing Retirement Contributions**

The pandemic pushed some of our colleagues to look long term and consider how to stay on track for their retirement. Another effective use of the extra time and funds on your side is to focus on investing in your retirement plan. The earlier you invest, the more growth potential your retirement account will have.

Here's how one employee's priorities changed:

"After graduating from college during the pandemic, my biggest concern was finding a way to earn money. Now with a job, I am leaning into more savings, including a six-month emergency fund instead of a three-month and reaching my RRSP contribution limit."

It's never too early to plan for retirement.


**5. Cutting Back**

With office closures and stay-at-home mandates, several employees who responded to our survey said they are rethinking their spending habits during the pandemic. 

Here is how an employee embraced Morningstar's mission to think and invest with the long term in mind:

"I have been spending a lot less in areas that I would have normally spent on and putting more in savings. One thing I hope to do is work on finding a better balance between savings and investing and spending while not feeling like it restricts my lifestyle." 


5 Financial Lessons for New Investors

For direct exposure to multidecade and sustainable urban development projects in Asia.

Sustainable Asian Cities Bond Strategy

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#### Heatwaves and other extreme weather events are warning us to rethink our relationship with nature. The financial sector must play its part.


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**Peter Harrison**, Group Chief Executive


Because we don’t quantify the benefits of nature, we overlook them altogether. Johan Rockström, the Swedish climate scientist who I recently shared a platform with at London Climate Action Week, reaffirmed this point – that if it weren’t for nature we’d already have crossed the 1.5 degree threshold.

There’s a well-known saying in management that “what gets measured gets managed”: a cliché, perhaps – but frighteningly accurate in the case of nature.

The world is waking up to the fact that our global economy must become not just net zero, but also nature-positive. Heatwaves and other extreme weather events are reminding us of the fragility of our natural environment. That means knowing what nature is worth.

It took us 15-20 years to get the language of carbon – and the disclosures of carbon – to become an intelligible feature of company reports. Today it is virtually impossible to get good data around nature. But we haven’t got 15-20 years.

More than half of our global GDP is dependent on the natural world. Protecting and preserving nature can make a powerful contribution to efforts to mitigate climate change. And there is a social imperative too: unless natural climate solutions create positive social impacts for local citizens and communities living on the land, they won’t be sustainable. Investors must partner broadly and deeply.

The response must be vigorous. As a company, we learned that to make meaningful change on diversity and inclusion would involve a revolution in our culture. The same root-and-branch revision is required in our approach to nature.

Asset managers, in particular, have to fundamentally change the way they operate.

At Schroders, we are taking a three-pronged approach. We have pledged to change the behaviour toward nature of every company we invest in; we will create new nature-based investment products, and use our solutions business to channel capital into new and existing funds. By doing so, we help our clients make a positive impact while also diversifying the sources of their returns.

Just as with net zero, the role of the financial sector in efforts to halt and reverse nature loss is both clear and critical. Following the recent delay of the United Nations biodiversity summit, COP15, to December this year, we must use these months to bring more of the finance sector to the table. There is no time to waste.

Action on nature starts with action to end deforestation. The IPCC estimates that “agriculture, forestry and other land use” contributes 22% to global emissions and half of that (11%) is from deforestation and land conversion.

That means getting measurement and data right. At Schroders, we’ve built a deforestation scorecard to look at exposure to and management of deforestation risk for companies. And we have made natural capital and biodiversity a priority for active engagement with companies.

Deforestation is increasingly an investment risk, but nature is also a significant investment opportunity. Natural climate solutions are efforts to conserve, restore or improve ecosystems in order to absorb and store carbon from the atmosphere. Analysis has estimated that these solutions have the potential to provide around a third of the climate action needed to achieve the Paris Agreement goals and avoid the worst effects of climate change.

One statistic starkly captures the issue: they may be a third of the solution, but today, natural climate solutions receive less than 3% of all global climate finance. How do we close that gap?

I believe that we can create a tipping point, and accelerate investment.

The investment case gets stronger by the day, rooted in the price of carbon credits. Demand for high-quality carbon offsets is set to grow exponentially, driven by national net-zero ambitions alongside major private sector commitments. This opportunity is underpinned by increasingly sophisticated data and tools that are allowing us to start to value the world’s natural assets.

While supply of projects remains a challenge, the growing demand and activity in this space is creating new opportunities to institutionalise project financing, structuring and development.

Schroders is excited to go into partnership with Conservation International with plans to create one of the first dedicated natural capital impact investment managers in Singapore. Called Akaria Natural Capital, the venture aims to achieve the scale and expertise to deploy with impact – and contribute new ideas for how to solve some of the bottlenecks for funding. 

Getting to grips with the social imperatives around nature action is fundamental to this partnership, to ensure these investments work for people, as well as places.

What’s exciting is the increasing collective momentum of the investment industry on this agenda. There are now $21 billion assets under management in natural climate solutions – doubling in the last five years. The Natural Capital Investment Alliance, launched by the Prince of Wales at COP26, is an important step in this shift. The 15 members of this group all have, or will have, investment vehicles that help channel capital into nature-focused projects.

The energy transition is complex. The transition to a nature-positive world will be fiendishly difficult. But it is imperative, urgent, and we have to make it investible. That’s why as we look ahead to the second half of the year, the financial sector must join the chorus of actors stepping up to take action on nature.






Peter Harrison: why we must make nature investible

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### While growth in the U.S and globally is expected to cool from its torrid pace in 1H21, fundamentals remain broadly positive and opportunities could arise in any meaningful bout of spread volatility.

Global growth appears to have peaked, with China clearly slowing and U.S. and European growth resilient but marginally softer. Easy base effects have largely passed, and ongoing pockets of COVID-related weakness continue to take their toll, particularly consumer expectation indicators. Among the major economies, U.S. growth remains the leader, due in part to less stringency on lockdowns and a general consumer willingness to largely maintain activity levels despite a resurgence in COVID cases.

While growth expectations in the U.S. remain resilient, headwinds have emerged, leading to lower revisions for Q3. Consumer spending has cooled as stimulus has expired and the Delta variant has led to a pullback in services-oriented spending such as restaurants, airfare, and hotels; with that said, the latest retail sales print highlighted a rebound in goods spending (excluding autos). Housing investment has also cooled as lack of inventory and high prices have offset sustained low mortgage rates. Elsewhere, uncertainty around the timing and composition of fiscal stimulus coming out of Washington has increased as lawmakers debate how to fund investment. This is notable as fiscal spending is expected to be a key source of sustaining above-trend growth. Despite these headwinds, we expect the Fed will likely begin tapering in November or December of this year, barring any meaningful payroll misses. While Fed Chair Powell has reiterated that the end of taper was de-linked from the initiation of rate hikes, an earlier end to tapering would give the Fed an option to pull rate hikes forward, if necessary.

With the potential of spread volatility in the near term, we have begun taking some chips off the table where we believe further upside is limited. This includes taking gains in select areas of CMBS and Non-Agency RMBS; we remain overweight Securitized broadly compared to corporate credit. However, given corporate fundamentals look strong, we would view bouts of spread widening as opportunities to add higher quality risk in sectors such as investment grade and BB-rated high yield corporates. We remain more cautious on emerging markets given the potential contagion from China and the Evergrande debacle. With growth expected to slow and inflation potentially peaking, we do not expect a meaningful move higher in U.S. interest rates, and have therefore reduced our short-duration posture across portfolios.

## Bond Market Outlook

**Global Rates:** Policy rates stay to stay low over the near term as investors digest growth, monetary policy outlook post-reopening rebound

**Global Currencies:** U.S. dollar to remain resilient vs DM, EM currencies

**Investment Grade:** Near-term outlook for IG credit remains positive, but valuations warrant defensive positioning

**High Yield:** Overall we remain neutral as fundamentals feel a touch softer

**Securitized:** Prefer areas in CMBS, CLOs where yield opportunities remain; residential credit still facing prepayment headwinds

**Emerging Markets:** Global economic strength helped, and will likely continue to help EM overall, although unsynchronized growth within the cohort is also an ongoing factor

## Rates, Spreads and Yields

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As of 08/31/21. Source: Bloomberg, Bloomberg/Barclays and JP Morgan. Past performance is no guarantee of future results.

## Sector Outlooks

#### Global Rates and Currencies

Inflation data remains firm, but the peak has probably past, in our view. Monthly readings have been decelerating since April and the YoY rate likely peaked in June. However, lingering impacts from supply disruptions seem likely to intersect with firming shelter inflation, which has some transient influences through supply, but structural support from still-firming wage growth.

In Europe, reopening has gained ground with the PMI now surpassing the U.S. Indeed, European activity remained resilient, while services activity in the U.S. slowed due to weaker demand and staffing issues. Within Europe, the services PMI has now overtaken the somewhat supply constrained manufacturing PMI. Similar to the U.S., reopening frictions have contributed to higher inflation in Europe, but the odds of stickiness seem lower than in the U.S. And while recent ECB commentary opened the door to some slowing of pandemic QE purchases in September, leadership probably does not favor a meaningful retracement of the recent step-up in purchases. The remaining PEPP allocation appears to necessitate a taper at some point which may lessen the signaling value of any action. The ECB’s Chief Economist Lane recently argued that the PEPP should be used to maintain favorable financing conditions while downside risks remain. In contrast, he suggested that the APP should be used to address the inflation gap vs. projections and differences in bond supply and demand. If needed, a slower PEPP purchase pace could be countered if needed by increases in the APP program, which still needs to be defined in the context of the new ECB 2% symmetrical inflation framework.

#### Investment Grade (IG) Corporates

Heavy supply at the beginning of August contributed to a slight sell-off, but as expectations for lighter September volumes began to form, investors stepped back in. Also, the move higher in interest rates attracted demand from yield-based buyers. A mixed bag of economic numbers increased concerns around the Delta variant’s impact on the reopening trade. However, while the pause in momentum likely gives the FED cover to maintain a dovish stance, comments from Jackson Hole suggest they are still on target for tapering asset purchases this year. While our near-term outlook for credit remains positive, we keep our strategic and tactical rating at Neutral. Seasonally heavy supply in September may provide an opportunity to add some IG risk at the margin. We see the most value in 7- to 10-year bonds with the long-end of the Treasury curve flattening. Sector wise, we like Telecoms, Utilities and Technology.

#### High Yield Corporates

In a reversal from July, August supply was very heavy early-on, but a slowdown late in the month saw the technical environment improve materially once the flow abated. Higher credit rated issues outperformed a bit as Treasuries settled into a comfortable range and CCC's lagged slightly on Delta concerns. While new supply mercifully shut down from the heavy volume earlier in August, we expect the onslaught to return in September. With year-over-year positive comparables easing - mostly due to Delta, supply chain issues and cost increases for nearly every input - there still seems to be enough pricing power to maintain or even improve margins. Indeed, ratings are trending positively and the default rate is near zero. While the Delta wave is slowing in the Sunbelt, it seems inevitable it will follow seasonal patterns and make its way northward. Oil has bounced back nicely and Natural Gas remains strong. We see the likelihood of continued positive "event-risk" as legacy names get upgraded or taken out.

#### Securitized Assets

Agency MBS underperformed Treasuries as investors remained cautious on the sector due to taper risk. Technicals were biased towards more MBS issuance while banks continue to add MBS at a much slower pace. Although spreads are expected to widen as FED tapering approaches, bank buying should support mortgages and continued strong-roll financing should help mortgages out-carry Treasuries in the near-term. Additionally, prepayment speeds are slowing and dampened taper talk from the Fed meeting should renew appetite for MBS outside the Fed if rates can stabilize.

We continue to carry a negative outlook for Mortgage Credit, but with a different qualification than earlier in the Spring. With prepayment and call risk still issues for total return driven market participants, the space is poised to continue to lag. Add in significant supply spillover from overloaded GSEs, elevated Prime Jumbo issuance and a better focused non-QM ecosystem, RMBS can add technically induced sloppiness to prepay risk catalyzed negatives.

CMBS's strong start to the year, which extended well into the summer, appears to be cooling with the approaching Fall temperatures. Although credit appetite is deep and perceptions of risk have shifted definitively lower, the now-tighter spreads offer less room to move lower and the path of least resistance favors spread-widening. While euphoria from the vaccines, reopening, etc., is fading, sentiment is weaker heading into a period of what is expected to be elevated issuance. As spreads in competing risk sectors continue to rally, CMBS cheapness remains and this becomes clearer as fundamentals continue to evolve mostly favorably.

With lots of deals working their way through the system this month, a potential source of stress on market conditions, we think they are nonetheless likely to do reasonably well given liquidity conditions. Non-benchmark ABS will continue to perform well fundamentally and command strong sponsorship from money managers with low-vol, low-return seeking strategies. However, with spreads now at, or through, pre-COVID tights after a strong June, outperformance is likely to be limited, with returns coming from carry and idiosyncratic tightening from ratings upgrades. We maintain our assessment as positive and increase our conviction. The fiscally improved profile of the US consumer coupled with ABS structural dynamics were already believed to provide the sector with solid footing to withstand this sustained period of elevated, albeit improving, unemployment. Indeed, recently enacted stimulus is acting as a fortifying bridge to the end of the pandemic.

#### Emerging Market (EM) Debt

The momentum and strength of the US economy coupled with the gradual re-opening in Europe continued to be supportive of the global recovery, however regional divergences in consumption patterns remain. Nonetheless, we expect global capital flows to EMs will correlate to favorable global financial conditions. The multi-speed and unsynchronized EM growth rebound is expected to continue, along with a strong rebound in goods trade as demand picks up, but supply chain uncertainties are a concern. Headline inflation continues to rise due to consumer demand, forex pass-through and higher commodity prices. EM corporates continued to see earnings improvement, led by commodity producers that benefited from rebounding oil and metal prices.

Positioning for a Growth Slowdown in Q3

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For the second time in little more than a decade, policymakers around the world have been forced to take extreme measures to avert a global economic collapse. The coronavirus outbreak has shut down swathes of international commerce, put entire countries in lockdown and left governments—even those ideologically opposed to state interference—propping up private industry.

Just as after the financial crisis of 2008, central banks slashed policy rates and printed money to fund asset-buying sprees. The aim is to lower market interest rates, making it easier for companies and governments to borrow.

Our investment experts discuss the significant structural shifts that are occurring as a result of low interest rates and how investors can capture the right investment opportunities in this landscape.

The power of central banks to move markets is undisputed but their power to revive economies has never been more in doubt. Central banks’ willingness to flood markets with cash and buy corporate as well as government debt has fuelled an astonishing rebound in risk assets. But for how long can asset prices decouple from economic growth? And what are the long-term implications for the financial system?

To examine these dynamics, this report draws upon extensive desk research and in-depth interviews with practitioners in the field. The key takeaways are as follows:

- Negative interest rates and quantitative easing are the biggest monetary experiments of modern times. Abundant central bank liquidity has buoyed asset prices and generated above-average portfolio returns over the past decade.
- This has significant implications on valuation metrics such as price to earnings multiples for stocks with different characteristics within the broad market. Stock selection will remain paramount in a low interest rate environment as economy-wide growth will not likely be sufficient to lift all boats, leading to a wider difference between stock market winners and losers.
- A low interest rate environment also enhances the appeal of alternative assets, such as private debt, infrastructure, real estate and private equity, which typically require long-term commitments. The broadening sector can offer investors flexibility in risk-return profiles, as they look beyond traditional investments for returns.

For more insights, please download the report: http://imas.org.sg/public/media/2021/06/30/1999_Below_zero_-_how_low_rates_are_reshaping_the_investment_landscape.pdf



Below zero: How low rates are reshaping the investment landscape

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# About the Initative

Let’s Invest Together! (LIT!) is the culmination of significant cross-industry effort, with IMAS’ Gamification workgroup, collaborating with MoneySense, CPF Board, and the SGX Group, to accelerate Optimai, our fintech partner discovered through the IMAS Digital Accelerator Program (DAP). By leveraging on technology, and the mechanics of gamification, we have created a prototype of a fast-moving investment education game, available on iOS and Playstore, readily accessible to the investing public. 


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Given the evolution of the investor base, many of whom have become more digitally savvy, the IMAS Education Committee saw the opportunity in 2020 to leverage on gaming technology and the IMAS DAP to create a fun and exciting utility to help build investment knowledge amongst the investing community.

Utilising real data to simulate actual events, the game is uniquely able to help investors better understand how the various asset class interact, their risk profile and how their investment decisions can impact their portfolios, thereby improve their ability to asset allocate and build resilient investment portfolio for themselves.

##### Download the game now:

1. [Google Playstore](https://play.google.com/store/apps/details?id=com.Optimai.LetsInvestTogether)
2. [Apple Store](https://apps.apple.com/app/lets-invest-together/id1576667625)

Let's Invest Together! (LIT!)

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Looking at the market today, it's easy to forget where we were at around 15 months ago. Many of the market declines of the past decade or so, including the stock market crash of 2008, are fast becoming faded memories for most of us. But it is the investors who endured these difficult times came out in perhaps the best shape, and as is often the case, those who had the nerve to stay invested were richly rewarded.

And yet, the decision about whether to change your investment strategy or sell a fund is usually not clear-cut, even in hindsight. After the dust has settled on a decision and the investment has performed well or poorly, the “right” answer is wholly dependent on the individual. Selling criteria are not a one-size-fits-all list that fit every investor, but there are some situations when selling is particularly ill-advised. Christine Benz, director of personal finance at Morningstar, picks these three key examples.

**Poor Short-Term Performance**
 
It’s almost never a good idea to sell a fund based on weak performance alone, especially over the short-term. You might have been tempted to sell in last year's market sell-off for example, but we now know the Covid crash was the shortest in history. Instead, if a fund is lagging its peers or an index, your first move should be to investigate why that is. It could be that the manager is simply sticking with an investment strategy that happens to be out of favour, as has been the case with many value-leaning funds in recent years. But weak performance may also be a sign that something more serious is afoot - Morningstar's own research has found that many active funds fail to beat the market over the long-term.

Researching an investment’s fundamentals can be time-consuming, which is why you don't want to get too caught up in investigating short-term bouts of underperformance. Most funds, especially those that are using truly active strategies, will trail their peers at times, often for very good reasons and sometimes for a few years or more (that could be the case with some perfectly solid, defensively positioned funds during a market rally, for example).

Instead, save your energy for checking up on funds when they've underperformed over longer stretches of time or in a period when you would have expected them to perform well. If, for example, you selected a fund because of its low-risk tendencies, but it lost far more than its peers in 2020, that's a legitimate reason to ask whether something about its strategy changed or its risk controls weren’t what you thought they were. And even if the fund isn’t bad, it may not be a good fit in your portfolio.

**Inconsistent Performance**

On a similar vein, investors often get themselves worked up when a fund’s relative returns are inconsistent on a year-to-year basis. Sure, it can be comforting to see a fund land in its category's top half like clockwork—and a small handful of funds has actually managed to generate return rankings that have been remarkably consistent from year to year.

But holding all of your funds to that standard would cause you to kick out some fine offerings that, while not consistent performers on a calendar-year basis, are consistent where it counts: they employ their strategies with discipline and don't waver, even if the market isn't rewarding them in the near term.

It's also important to remember that a calendar year is a fairly short and arbitrary time period, and a fund that has looked erratic over January-December time periods may appear perfectly consistent when measured over a different 12-month time frame—say, from April to March of each year. Investors shouldn't get too hung up on year-to-year performance consistency when deciding what to hold in their portfolios. Looking at annualised returns can be a better way to judge long-term performance, as these smooth out good and bad periods to indicate what average return an investor has received each year. 

**Macroeconomic News**

Macroeconomic news - whether it's the direction of interest rates, rising inflation or GDP growth in China and India - often appears right alongside news about the market's trajectory. And it's true that what's in the headlines has the potential to move the markets up or down on a daily basis, or even over longer time frames. The trouble is that by the time a certain news item makes its way into the headlines, other market participants have already digested it and priced it in.

If you decide to sell your fund based on that news, you're likely to be too late. Instead, a better tack for investors, at least as it relates to their portfolios, is to keep their heads down and focus on factors that they can control: their savings and spending rates, the quality of their investment holdings, and the total costs they pay for those investments. There is much virtue in tuning out the noise when it comes to managing your portfolio.





*©2021 Morningstar. All rights reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided as of the date written, solely for informational purposes; and subject to change at any time without notice. This content is not an offer to buy or sell any particular security and is not warranted to be correct, complete or accurate. Past performance is not a guarantee of future results. The Morningstar name and logo are registered marks of Morningstar, Inc. This article includes proprietary materials of Morningstar; reproduction, transcription or other use, by any means, in whole or in part, without prior, written consent of Morningstar is prohibited. This article is intended for general circulation, and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Investors should consult a financial adviser regarding the suitability of any investment product, taking into account their specific investment objectives, financial situation or particular needs, before making any investment decisions. Morningstar Investment Management Asia Limited is licensed and regulated by the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors only. Morningstar Investment Adviser Singapore Pte. Limited is licensed by the Monetary Authority of Singapore to provide financial advisory services in Singapore. Either Morningstar Investment Management Asia Limited or Morningstar Investment Adviser Singapore Pte. Limited will be the entity responsible for the creation and distribution of the research services described in this article.*

3 Bad Reasons to Sell a Fund

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Last week, we tested a strategy with two [Chinese equity indices](https://sg.morningstar.com/sg/news/211963/does-the-rhyming-%e2%80%9csell-in-may-go-away%e2%80%9d-work.aspx), and talked about how it timing the market makes you lose out on gains over the long-term. The modeling of index returns concluded that botching a market-timing decision does sacrifice a period of (strong) returns. It proved our point – time in the market is better than timing the market.

Tom Lauricella, Editorial Direct for Professional Audience at Morningstar, explains that [ineffective market-timing](https://www.morningstar.com/articles/972119/3-charts-that-show-why-investors-should-stay-the-course-throughout-market-turmoil) efforts can result in a significant opportunity cost and show the effects of missing the one best month on an annual return. “Although successful market-timing may improve portfolio performance, it is very difficult to time the market consistently,” says Lauricella, adding that the long-term gains from US stocks have been demonstrated to offset short-term losses.

Even worse, poor market timing means you give up the chance to gain more from the compounding of reinvested gains, therefore the net effect in an investment strategy is negative when compared to a portfolio that stays the course.

**What is Compounding?**

In a short answer, staying the course is the key to allow the compounding to work out. But what exactly drives compounding. Let’s start with what’s known as the ‘compound interest’ formula:

**End value = Initial value of capital*(1+Rate of change)Time**

1.  Initial Capital determines how much in absolute terms you can gain at a certain rate for a period of time.
2.  Rate of Change or the rate of investment return defines at what pace the initial and reinvested capital is to compound.
3.  Time Horizon defines for how many time periods your assets compound itself.

Put simply, compounding can be explained as the money (or returns) your portfolio earns each year, and then both your initial capital and your returns of previous years earn returns, leading to a point where you have a much larger capital pool. That means, the larger each of the equation’s components (on the right) is, the bigger your total capital would snowball into overtime.

It’s clearer in a side-by-side line graph that plots four scenarios. First, we let the base case (purple line) be a portfolio with a starting capital of $10,000. The portfolio invests in assets at the end of Year 0 that could generate an average of 10% each year and remains the same for the next 35 years.

For each of the remaining three lines, only one variable is adjusted in illustrating the outcome upon a shortened time horizon, a lower rate of return and a smaller capital to start in the equation.

![Elements in compounding.jfif](/uploads/Elements_in_compounding_c94ad1f49c.jfif)


With all else equal, beginning with capital in half means the portfolio will grow at the same rate but arriving at the exact 50% in the end value of the base case.

By contrast, when axing the investment horizon and the rate of return by half, what you afford is a return far less than just half of the base case. Shortening the investment horizon gives up the sessions that the portfolio can compound, while a smaller investment return simply flattens the curve by a large extent. Both result in merely 20% in end value as compared to the base case.

With a view to long-term performance, we go back to the base case of our data simulation and assume that in each calendar an investor adds 10% and 20%, in this case $1,000 and $2,000, to their portfolio (shown as dotted lines).

![Enlarging the compounding effect.jfif](/uploads/Enlarging_the_compounding_effect_64ba5c7108.jfif)


We find that upsizing the total portfolio value on a regular basis takes advantage of the compounding, enabling the portfolios to notch high absolute returns. This is for those who don’t have a large pot of starting investment capital, say at the early stage of their careers. Instead of sitting on cash to save up a sizable amount in some time, it is worth considering starting small to let the compound work. Expanding the capital base can come later by building up a disciplined top-up mechanism to your portfolio.

Indeed, the stock market is seen as a risky investment if you look at it for the short term. Data have shown proof that long-term returns have outsized short-term fluctuations and have triumphed over the risk of missing the one best month on an annual return by betting in and out. In practice, trying to call the trough and the peak of the market prices is distinctly tricky. The strategy involves a great deal of knowledge and luck. For individual investors who lack experience and time in technical research analysis, market timing would then be primarily driven by biases like loss aversion or herd mentality, which may cause some investors to end up buying high and selling low. Staying the course will bear fruit if you endure the time with discipline.

 

 

*©2021 Morningstar. All rights reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided as of the date written, solely for informational purposes; and subject to change at any time without notice. This content is not an offer to buy or sell any particular security and is not warranted to be correct, complete or accurate. Past performance is not a guarantee of future results. The Morningstar name and logo are registered marks of Morningstar, Inc. This article includes proprietary materials of Morningstar; reproduction, transcription or other use, by any means, in whole or in part, without prior, written consent of Morningstar is prohibited. This article is intended for general circulation, and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Investors should consult a financial adviser regarding the suitability of any investment product, taking into account their specific investment objectives, financial situation or particular needs, before making any investment decisions. Morningstar Investment Management Asia Limited is licensed and regulated by the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors only. Morningstar Investment Adviser Singapore Pte. Limited is licensed by the Monetary Authority of Singapore to provide financial advisory services in Singapore. Either Morningstar Investment Management Asia Limited or Morningstar Investment Adviser Singapore Pte. Limited will be the entity responsible for the creation and distribution of the research services described in this article.*

How Your Money Works for You

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‘Doing (almost) nothing’ most advantageous for investors – according to newest NGFS climate scenario update
30 September 2022

Earlier this month the global central banking community, the Network for Greening the Financial System (NGFS¹¹), released its third vintage of climate scenarios for forward looking climate risks assessment.

At Ortec Finance we are passionate believers in the importance of integrating forward-looking climate analysis into investment decision-making. Therefore, we applaud NGFS’s efforts in socializing, designing and making readily available top-down climate scenarios. Nevertheless, an expert critical analysis of these scenarios remains important in order to challenge modeling methodologies and assumptions. How else to progress in the field?

In our [earlier article](https://www.ortecfinance.com/en/insights/blog/stargazing-or-have-the-ngfs-and-the-bank-of-england-missed-an-opportunity-to-drive-the-race-to-zero), we set out an extensive analysis of the strengths and limitations of the earlier NGFS climate scenario versions. Many of the comments made remain valid in respect to this latest update.

Key additions include:

- **Increased granularity of sectors** - Transport: Freight and Passengers, and Industry: Cement, High-value chemicals, Non-ferrous metals, Steel and Others
- **Physical risk GDP losses** have been doubled. GDP losses from chronic physical risks reach more than 6% in 2050, and up to 18% by the end of the century in the Current Policies scenario.
- **Acute physical risks** (cyclones and river flood) are now included but only translated to GDP.

These changes have resulted in quite different impacts from the earlier version. For example, the shock to equity is materially larger.

**However, our team at Ortec Finance, in collaboration with macro-modeling experts at our partner organization [Cambridge Econometrics](https://www.camecon.com/), remain concerned.**

When looking at US equity peross the 6 NGFrformance acS scenarios on a 30-year horizon, the Current Policies and the NDC scenarios show the best performance. They strongly outperform all the other 2 degrees and Net Zero scenarios. This is a harmful message and not a credible one. It points towards a continuing underappreciation of physical risks, and omission of likely market pricing-in and market volatility dynamics and modelling choices.

### Figure 1: Cumulative returns of US equities across NGFS climate scenarios
![chart.jpg](/uploads/chart_1bef62141a.jpg)

The points below explore the NGFS’s climate scenario limitations in more detail:
1. **Physical risk modelling remains problematic.** The literature used as a basis for NGFS slow onset event modelling is one of the most optimistic in its field . NGFS assumes physical risk to be linear, therefore completely side-stepping the issue of non-linear feedback loops and tipping points. Regarding the extreme weather modelling, a first step has been made, but effects have not yet been translated to financial impacts.
2. **No market risk considered.** The financial impacts shown in the NGFS scenarios capture only direct impacts and how they are expected to unfold in the real economy. They do not include a climate scenario narratives layer on how financial markets may react to transition- and physical risks materializing in the real world. Inclusion of market pricing-in dynamics and/or market sentiment shocks can significantly change the time horizon in which climate-related risks or opportunities become material to a portfolio’s risk and return implications.
3. **Macro-model choice.** Even though the NGFS states that it reflects ‘the uncertainty inherent to modelling climate related macroeconomic and financial risks’ the NGFS scenarios only look at general equilibrium model results. Non-equilibrium models - which are models recognised for being better suited to capture the dynamics of economies in transition – have not been considered. For more information on equilibrium vs non-equilibrium models please refer our publication in The Actuary magazine [here](https://www.theactuary.com/2022/03/01/under-bonnet-different-economic-engines-drive-climate-change-scenario-models).

In addition to the main points above, the scenarios are rife with inconsistencies and unclarities we cannot bring home. A couple of examples:

ּּ• Carbon prices are lower in Phase 3 transition scenarios compared with Phase 2 – in 2050 the carbon price in the previous Delayed transition scenario reaches over USD (2010) 600 t/CO2 while it approaches USD (2010) 400 t/CO2 now. Without further information it is unclear how temperature outcomes are maintained while policy ambitions are dialled down.
ּּ• The global CO2 emissions trajectory in the Current Policies scenario is almost flat between now and 2040, which is highly unlikely given a strong economic growth and a relatively weak set of short-term decarbonisation policies currently implemented.

In view of the above we would recommend that the NGFS:
ּּ• Reflect on the danger of the overall messaging delivered via these climate scenarios that are likely to be widely accepted and used by financial institutions around the world. Do Central Banks really intend to signal complacency when it comes to portfolios’ climate risk exposure?
ּּ• Reassesses the appropriateness of its slow onset physical risk modelling to ensure that it better reflects the full range of uncertainty.
ּּ• Supply detailed narrative descriptions of the scenarios to correctly understand, interpret and apply the scenarios in business and financial analyses and nuanced decision-making.
ּּ• Provide sensitivity analysis of the scenario results to provide insights into the key assumptions that move the dial on reaching low carbon outcomes.

¹ The NGFS scenarios are based on a climate related damage function estimated by Kalkuhl, M. & Wenz, L.: The impact of climate conditions on economic production. Evidence from a global panel of regions. J. Environ. Econ. Manag. 103, 102360 (2020). There is a wide range of publications on the estimation of climate related damage functions, all of which provide a lower bound of likely damages due to methodological and data constraints (eg. no climate tipping points taken into account), but among those, the Kalkuhl & Wenz (2020) provides a relatively small damage estimate. We think the Burke, M. and V. Tanutama: Climatic Constraints on Aggregate Economic Output, Working Paper 25779, National Bureau of Economic Research, April 2019 provides a better estimate, which also implies larger economic damages due to temperature rise. A good literature review with cross-comparisons is provided by Piontek, F. at al.: Integrated perspective on translating biophysical to economic impacts of climate change, Nature Climate Change, Vol 11, July 2021.

![ces-compass.png](/uploads/ces_compass_cdd891440d.png)

Ortec Finance’s [**Climate & ESG Solutions**](https://www.ortecfinance.com/en/solutions/climate-esg-solutions) deliver state-of-the-art customizable solutions for climate resilient investment decision-making by combining independent, research-backed climate & ESG knowledge, advanced financial models, and innovative technology.

[**Climate MAPS**](https://www.ortecfinance.com/en/insights/product/climate-maps) quantifies your portfolio's exposure to systemic climate-related financial risks & opportunities across different climate scenarios. This enables investors to consistently integrate climate risk into risk-management, strategic asset allocation and asset liability management for investment decision-making.

When it comes to investors, we recommend they ensure that they are well versed in climate-scenario methodologies and associated assumptions in order to ensure well informed use of these tools. For more information, please contact us below.

![ortect-finance1.jpg](/uploads/ortect_finance1_11657515e9.jpg)

Email: contact@ortecfinance.com

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Email: contact@ortecfinance.com










Stargazing II

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[SGX ESGenome](https://www.sgx.com/sustainable-finance/esgenome), a digital disclosure portal for companies to report Environmental, Social and Governance (ESG) data in a structured and efficient manner, and for investors to access such data in a consistent and comparable format, was launched in September 2022.

SGX ESGenome enables companies to report metrics aligned with global standards and frameworks, ensuring regulatory compliance that meets investor needs for consistent and comparable ESG data.

It is one of the four digital platforms of [Project Greenprint](https://www.mas.gov.sg/-/media/MAS/News/Media-Releases/2021/Infographic_MAS-Project-Greenprint.pdf) by the Monetary Authority of Singapore (MAS), a culmination of MAS and SGX’s efforts to simplify, standardise and improve corporate disclosures, as well as enhance stakeholder access and use of consistent and comparable ESG data.

SGX ESGenome is a Software-as-a-Service (SaaS) provided for SGX-listed companies at no cost as it aims to support companies in ESG-related disclosures, data collection, tracking and reporting

Companies will have access to the list of [SGX Core ESG Metrics](https://www.sgx.com/regulation/sustainability-reporting#SGX%20Core%20ESG%20Metrics) which is mapped to global standards and frameworks. The list of SGX Core ESG Metrics was published in 2021 to promote the alignment between reporting parties and users of ESG information, allowing for greater consistency and comparability across companies and sectors.

SGX ESGenome also offers more than 3,000 other ESG metrics that are mapped across global standards and frameworks such as the Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD), and Sustainable Development Goals (SDG). Companies may also choose to create other custom metrics that are industry/company specific. 

Key features of the platform include:

•	Framework agnostic platform with metrics mapped across global ESG reporting standards and frameworks including GRI, TCFD, SDG, to meet with different requirements

•	Access to SGX Core ESG Metrics and over 3,000 global ESG metrics with guidance on disclosure

•	Create custom/bespoke metrics that are industry or company specific

•	Monitor your ESG performance over time, and view insights and analytics on the platform

•	Download ESG datasets in a structured format

•	Assign multiple accesses for internal stakeholders as part of your regular sustainability reporting, ESG data collection and tracking process

•	Option to select data/information to be kept private as part of an internal workflow management tool

•	Auto-generate sustainability reports within the platform


For investors and financial institutions, SGX ESGenome will provide access to relevant and comparable ESG data that allows for meaningful peer benchmarking and tracking of sustainability commitments. This enables capital to be mobilised more efficiently toward sustainable companies and projects. 

MAS noted that it will also draw on the learnings from ESGenome to address the reporting needs of the broader universe of corporates, notably small and medium-sized enterprises, and supply chain partners and suppliers, as part of its ongoing work on Project Greenprint.

The initiative is supported and welcomed by many industry partners. Click [here](https://links.sgx.com/FileOpen/2022-09-12-ESGenome%20press%20release-SGX-FINAL.ashx?App=Announcement&FileID=731313) to read quotes by the following partners: The Association of Banks in Singapore (ABS), Investment Management Association of Singapore (IMAS), Securities Association of Singapore (SAS), SGListCos, Sustainability Reporting Advisory Committee (SRAC) and Ernest & Young.











Launch of SGX ESGenome Disclosure Portal to streamline sustainability reporting and enhance access to ESG data

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It’s becoming crystal clear that for the finance industry to make good decisions in terms of capital allocation to environmental, social, and governance (ESG) assets, we will need to improve transparency and trust at the data level.

Asset managers are getting savvy to the need for better screening and scoring of everything in the ESG universe, as well as understanding the data they are receiving from ESG data providers while using more of their own analytics capabilities to project out into the future.

One of the remaining challenges is an over-reliance on publicly available non-financial ESG data, with what’s available in the private sector typically far more fragmented and non-transparent, making it hard for institutions and asset managers operating in private markets when it comes to ESG screening.

## Financial market modeling needs better ESG data

In addition, there is a lack of real-time ESG data, with much of it being historic in nature due to reporting happening once or, at best, twice a year.

As capital allocation decisions are based on complex models that make assumptions on future outlooks based on present data, this lack of transparency around ESG data makes it very difficult to accurately predict the future in these areas and therefore to be effective capital allocators.

In particular, we have observed that large asset managers are at more of a disadvantage versus banks and insurers who are more likely to have confidential/non-public data available from their expansive customer bases.

However, with much of today’s asset allocation being done by the large asset managers such as BlackRock and Vanguard, who between them manage nearly $20 trillion in assets, it is clear the ESG data situation could lead to some less-than-optimal capital allocation decisions.

## Truly efficient markets need gold data standards

This, potentially, undermines the very idea of efficient markets as more and more investments are being screened for ESG criteria using sub-optimal data.

Beyond just the accessibility of data, there is another headache on the horizon: no “single source of truth”, something the blockchain was originally created to help address.

We believe [STACS](https://stacs.io/) can be an upstream data partner to the ESG ratings agencies, many of whom are also grappling with the challenge of a lack of public data and single source of truth but whose clients (the asset managers) are looking to them to help solve.

An analysis of 62 of the largest asset managers worldwide found that most use between two and five different ratings providers and some even use up to 10 different third-party vendors to cover their ESG data needs, according to EY.

Alternative data sources will become increasingly important in the desired goal of reliable real-time ESG data through technologies such as satellites, IoT, and drones that offer insights into supply chains, production (i.e. agriculture), and transportation networks.

ESGpedia - Enhancing Trust in ESG Data and Finance

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Dr Darian McBain, chief sustainability officer of MAS, was the guest of honour at the Project Greenprint industry showcase event, where ESGpedia was launched.

[ESGpedia](https://esgpedia.io/), officially launched on 18 May 2022 at the Project Greenprint Industry Showcase event held at Google, powers the ESG Registry of Monetary Authority of Singapore’s (MAS) Project Greenprint. 

There’s a profound disconnect between the ESG data financial institutions and companies need, and what is available to them.

Serving both financial institutions and corporates, ESGpedia aims to provide two gold standards for asset managers: that single source of truth we have been talking about, as well as holistic ongoing project data and ESG certifications across multiple sectors, shining a light on both public and private companies.

First of its type, ESGpedia aggregates all ESG efforts and provides the necessary digital tools for effective ESG finance, bridging the gap in ESG data and finance where there is no other such platform today.

**Dr Darian McBain, Chief Sustainability Officer at MAS**, said, “The launch of the blockchain-based ESGpedia platform establishes a robust base for powering the Greenprint ESG Registry, combining STACS’ work on aggregating high quality ESG data from multiple certification bodies and verified sources, with the ability for financial institutions, corporates, and regulators to access this trusted data via a single source in accordance with their needs. In time, data housed in the Greenprint ESG Registry will form a central pillar that underpins the financial sector’s effective mobilisation of capital towards sustainable projects, as well as the accurate tracking and quantification of emission reductions, abatement levels, and other sustainability KPIs linked with these projects.”  

Companies going green need easier access to ESG financing, while financiers with idle capital can leverage on more insightful data to better allocate funds to ESG effectively. 

We invite financial institutions and corporates large and small to get in touch with us if you’re interested to navigate the opportunities in going green via ESG data and technology – only together we can make good progress towards solving the ESG data puzzle and truly enable effective sustainable finance for the industry. 

Read the press release [here](https://stacs.io/esgpedia-officially-launches-aggregating-verified-esg-data-and-certifications-across-various-sectors-to-enable-more-effective-green-finance/).

Sign up for a trial of [ESGpedia](https://esgpedia.io/)

[Watch financial institution partners comment on ESGpedia and how it enables holistic ESG data to support Green Finance](https://youtu.be/JufEFPT0hJg)


Why data remains the biggest ESG investing challenge for asset managers

Ed Perks, Chief Investment Officer of Franklin Templeton Investment Solutions discusses how rapidly changing economic and market conditions could lead to a shift in strategy for income investors.

Increasing Yields: Strategy Shifts for Income Investors

Does investing in ESG hurt investment returns? Are ESG portfolios only concerned with saving the environment? AllianceBernstein's Aditya Monappa tackles these myths and answers investors' burning questions.

Beyond catchy taglines: Navigating ESG investing with AllianceBernstein

In the second episode of a four-part series, we explore briefly how the pandemic has prompted Singaporeans to kickstart retirement planning. 

"Rethinking Retirement" is a study commissioned by Fullerton Fund Management to find out what Singaporeans think about retirement, as well as how digital technologies and COVID-19 have altered their approach to it. 

Impact of COVID 19 on retirement planning

A joint initiative of IMAS and LIA