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### Lim Yuin
Chief Investment Strategist

### Dawn Leong
Lead, Content & Communications

##### **Global equity markets have continued to grind higher in the second quarter. Valuations of the US equity markets, particularly for mega technology stocks, have already priced in the growth potential underpinning the Artificial Intelligence (AI) theme. Therefore, we see limited upside potential for developed markets as we face a likely economic slowdown in 2H 2023 or early 2024. In Asia, performance of China equities has been disappointing this year and there are few catalysts to drive markets higher despite attractive valuations. Therefore, we prefer Japan and India equities on a relative basis. We also see opportunities in bonds due to attractive yields and as a hedge to equity risks.**


### RISKS ELEVATED IN DEVELOPED EQUITIES MARKET

- Global equity markets have continued to grind higher in the second quarter on i) easing inflationary pressures, ii) stabilization in the global banking sector, iii) resolution of the US debt ceiling, iv) a pause in US interest rate hikes, and v) a general believe that AI would bring transformative growth to the global economy. The dominance of the AI theme is particularly pronounced in the US equities market with the AI-related stocks, case in point being Nvidia, driving the bulk of the gains in the US equities market.
 
- We are positive that the current developments in AI could drive an acceleration in innovation and longer-term productivity gains, but the more immediate risk of a significant economic slow-down from the lagged impact of interest rate hikes over the past year should not be underestimated. We are already seeing growth headwinds from Europe and China – the Eurozone economy is losing momentum after a strong first quarter in 2023 due to the tailwinds from declining energy prices, while China’s weak April activity data suggests that its post-COVID recovery could have stalled amid worsening geopolitical tensions. As such, we reiterate caution for the developed equities markets especially when market breadth is narrow, and valuations are elevated. 


### CHINA’S GROWTH SLOWIN
- China equities performance this year has disappointed investors, post reopening of its economy in October last year. Indeed, second quarter economic data on consumption, manufacturing, and exports has stalled. We believe that several catalysts are required for a rejuvenated rally in China equities: i) better economic data that suggests sustained growth momentum, ii) announcement of more economic support policies by the Chinese government, and/or iii) improving geopolitical relationship with the US. 

- On a longer-term basis, we remain positive on China equities due to its growth trajectory and attractive valuations. We see near term trading opportunities during the Politburo meeting in July on potential announcement of awaited stimulus by the Chinese government.
 
### OPPORTUNITIES IN JAPAN AND INDIA EQUITIES
- There has been renewed interest in Japan and India equities markets of late. This is reflected in the record purchase by foreigners of JPY5.5 trillion worth of Japanese equities in the last quarter.  We have expressed our optimism behind [Japan](https://lgidirect.com.sg/japan-market-outlook-turning-tides-lionglobal-japan-fund/) and [India](https://lgidirect.com.sg/india-market-update-2023-lionglobal-india-fund/) equities in our latest market updates.

- In essence, there are two key reasons why we are positive on Japan equities. First, companies have become more proactive in increasing their dividends and share buybacks to improve their capital efficiency as requested by the Tokyo Stock Exchange. Second, Japan is finally exiting from its deflationary phase and wages are rising at rates not seen since the 1990s – we believe this will drive consumption and growth in the domestic economy.

- India is undergoing a manufacturing renaissance, poised to become a potential factory of the world. The Modi government has also undertaken a series of positive reforms to cut red tapes, streamline their tax codes and improve infrastructure to attract foreign direct investments. Furthermore, India’s burgeoning middle class is but the beginning of a multi-year economic tailwind for India. 

### OPPORTUNITIES IN BONDS
- We see better risk-reward opportunities in bonds relative to equities. We prefer short duration, higher quality bonds as yields are attractive and they offer the potential for capital appreciation should we enter a recession. 

- We also see selective opportunities in certain Asian credits with spreads in certain segments still wide as investors may not have fully returned on concerns over yield volatility. Despite concerns of a slowing Chinese economy, we believe that the potential of major credit risks for the rest of the year remains low.

 

**Figure 1: Valuation and consensus earnings forecast**

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*Source: Thomson Reuters, 23 June 2023, Note: F – Consensus Forecast, x – excluding, P/E – Price to Earnings*

Disclaimer
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. It is for information only, and is not a recommendation, offer or solicitation for the purchase or sale of any capital markets products or investments and does not have regard to your specific investment objectives, financial situation, tax position or needs. Investments in the products mentioned herein are not obligations of, deposits in, guaranteed or insured by LGI or any of its affiliates and are subject to investment risks including the possible loss of the principal amount invested. You may wish to seek advice from a financial adviser before making a commitment to undertake any investment. In the event that you choose not to seek advice from a financial adviser, you should consider carefully whether the investment is suitable for you.

The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. Any opinions, projections or forward-looking statements expressed herein or information presented (which includes estimates, graphs, charts, formulae or devices) is subject to change or correction at any time without notice and is not to be relied on as advice. You are advised to conduct your own independent assessment and investigation of the relevance, accuracy, adequacy and reliability of any information contained herein and seek professional advice on them. No warranty is given and no liability is accepted for any loss arising directly or indirectly as a result of you acting on such information.

References to specific corporations/companies and/or their trademarks are not intended as recommendations to purchase or sell investments in such corporations/companies nor do they directly or indirectly express or imply any sponsorship, affiliation, certification, association, approval, connection or endorsement between any of these corporations/companies and LGI or the products and services of LGI. It should not be assumed that investment in the securities mentioned was or will be profitable.

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2H 2023 - Market Outlook  - Opportunities in Alternatives to China

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##### By Monica Defend, Head of Amundi Institute 

There’s a growing global consensus on the urgent need to combat climate change. But governments’ uncoordinated reactions to energy price spikes in the past year showed that a successful and orderly transition to a greener economy is far from guaranteed. A ‘disorderly’ transition, driven by disjointed policy actions therefore weighs more heavily on our baseline scenario for our capital market assumptions, our long-term asset class forecast and strategic allocations for the year. Limiting the rise in temperatures over the net zero 2050 horizon is the shared endgame, but disruptive themes will likely profoundly affect the real economy and financial markets.

In the near term, the energy transition could provoke bouts of inflation due to higher carbon and commodity prices. But we believe price pressures won’t be persistent. A more lasting impact may be seen from a shift away from fossil fuels, technological changes, and initially lower productivity. This could dent domestic demand and may mean economic growth is more subdued in the medium to long term.

Central banks will likely be cautious about running down their balance sheets, but aggressively use short-term interest rates to counteract inflationary swings. Monetary policy will try to prevent debt levels from becoming explosive, while keeping long-term rates under control. Central banks’ balance sheets will therefore stay well above pre-Covid levels. Sectors that are most closely linked with the green transition should be the biggest beneficiaries from policymakers’ support - a sort of ‘green’ quantitative easing.

Recycling carbon tax revenues into climate-related activities that help households and firms may also offset part of the transition’s negative impact on growth. This could translate into higher future productivity, while helping to mitigate social costs and pushback from the most vulnerable parts of the population. Managing the social costs will likely be key to the transition, as the effects of climate change are felt unevenly across communities.

A more inclusive growth model could be promoted by rebalancing the national share of income towards labour, without significantly affecting the economy. Higher wages will compress corporate profit margins. But higher disposable income will buoy household consumption and should help to support companies’ revenue.  We estimate that a 7% increase in the labour share of income deriving from higher wages can be accompanied by less than a 10% decrease in cumulated profits over the next 20 years in most developed countries.

New legislation aimed at decarbonising energy supply will affect emerging and frontier economies the most, while more developed and less carbon-intensive economies will cope by diversifying the composition of their exports. Investment plans should therefore accompany the phasing-out of fossil fuels in countries and sectors where their legacy is strongest.

In our view, investors should therefore factor in the implications of a shift towards a net zero world, driven by new policies, technology, and changing consumer preferences. The climate transition presents both risks and opportunities for investors, and energy transition themes will remain in the limelight for the foreseeable future. 

In an era of more urgent but less coordinated transition, we expect equity returns will be lower over the next ten years than in the past decade. But emerging markets, particularly Chinese and Indian stocks, may offer interesting opportunities, while the US remains favoured among developed markets. From a sectoral perspective, we believe the leaders in the green transition will be favoured together with Information Technology, and the outlook for value investing looks positive.

After a lost decade, bonds are returning to their long-term trend. This is reviving their role as a potential portfolio risk diversifier, although we anticipate higher volatility given greater uncertainty and a weaker economic outlook. Investment grade credit could benefit from higher government bond valuations.  Emerging market bonds can offer higher yields, but might be challenged by potentially higher default rates.

Real and alternative assets, as well as commodities, will also be crucial, in our view, for building inflation-resilient portfolios. Private equity, particularly in the US, tops our expected returns ranking while, on a risk-adjusted basis, global private debt is favoured. Hedge funds also may offer an appealing profile, having the lowest risk across the spectrum of real and alternative assets, and appealing returns. Real estate and infrastructure are vulnerable to the impact of climate-related events, but are appealing from a diversification standpoint, which may be key to targeting higher returns in an environment of higher risks.


A rocky net zero pathway calls for a new approach to portfolios

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Author: Carole Hodorowicz

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

Japan Market Update 2023

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Wealth managers are allocating more client capital to private assets. We look at the reasons so many are doing so, and specifically why they’re doing it now.

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**James Lowe**
Sales Director, Private Assets and Investment Trusts

Private client wealth managers have had robust arguments for allocating to private assets for some time. By 2021 four in five UK wealth managers had invested a portion of clients’ money in private assets.¹

These allocations are typically made in pursuit of enhanced performance and diversification, arguments that historic data continues to support. But other factors, such as the emergence of new vehicles for private asset investments, and the declining number of publicly-quoted companies, are also driving the trend.

Investors are also watching the investment landscape shift and assessing how resilient portfolios will be to a much altered environment. Of the major themes unfolding – like artificial intelligence and the renewable energy transition – many require private capital backing.

### How robust are the return and diversification arguments?

Past performance for numerous private asset classes compares favourably with liquid investment types, like traditional equities and bonds, over longer investment horizons.

![chart01.png](/uploads/chart01_5c2f84f673.png)

Crucially, private markets also have a history of performing differently to liquid markets.

Measuring how different investments move relative to one another – the correlation – is crucial to creating meaningful diversification. Again, data indicates that private assets can contribute to portfolio diversification.

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### What do the numbers mean?

A correlation of 1.0 (technically the “correlation coefficient”) means two assets move in exactly the same way. Smaller numbers indicate lower correlation.

James Ellison, Head of Private Assets Data Insights at Schroders Capital, explains:

“Private market investments offer a compelling means of diversifying a portfolio. The correlation between private asset classes and public markets is lower - as shown by the table. This allows them to provide diversification benefits by moving independently of the public markets.

“As well as behaving differently to public markets, they tend to behave differently to each other; well-balanced private asset portfolios can help mitigate risk. Additionally, the investment strategy itself can create further diversification, such as private equity investing in the lower mid-market.”

### New investment vehicles offer institutional-style private asset exposure for wealth managers and their clients

The above explains the familiar attractions of private assets for both advisers and their clients.

But what about the “why now”? What has changed?

Even for those with private market allocations, the overall share of portfolio remains low. The Investment Association found that private market investments comprised an average of 5% of UK wealth managers’ assets under management in 2021² . By comparison, our own research indicates that institutional investors had allocated 14% of their portfolio to private assets the same year³.

This discrepancy is in part because institutional investors have had access to a much broader range of solutions, structures and private asset managers. The options for individual investors, advised or otherwise, has been limited.

In the UK, individual investors have been able to use investment trusts for exposure and little else. However, ongoing growth and development in the private asset industry is changing things.

The long term asset fund (LTAF) has been spearheaded by UK regulator the Financial Conduct Authority (FCA) as a “new category of open-ended authorised fund designed to invest efficiently in long-term assets.”

The FCA created a new regulatory regime in 2021 to realise the LTAF structure.

LTAFs were initially designed to put pension capital to work supporting the UK’s long-term economic growth and the transition to a low carbon economy. New developments mean advised and discretionary investors will also be able to invest in LTAFs.

Widening the LTAF scope means more options in the UK authorised funds ecosystem, providing another access point to private markets for investors. We expect the LTAF to be a complementary tool to existing private asset structures – like investment trusts - offering new flexibility in how UK investors will be able to meet their objectives via private market investments.

### Public markets offer shrinking opportunity to access growth investments

While access has improved for private markets, options in public markets have continued to narrow.

The number of listed companies has been falling for years, and not just in the UK. The trend has been echoed in major markets around the world.

In 1996 there were over 2,700 companies on the main market of the London Stock Exchange. At the end of 2022 this had collapsed to 1,100, a 60% reduction. There has been a near-75% fall in the number of UK-listed companies since the 1960s.

Germany has shed more than 40% of its public companies since 2007 and the US has experienced a 40% drop since 1996.

One of the most striking effects of this decline is that the stock market now provides exposure to a dwindling proportion of the corporate universe. This is not just a UK issue: in the US, for example, fewer than 15% of companies with revenue over $100 million are listed on the stock market³ . Ordinary savers are largely deprived of the opportunity to invest directly in the rest.

Investors who focus solely on the stock market are missing out on a large and growing part of the global economy. Where they can, investors will need to explore private asset options to capture the growing private investable universe.

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The decline is another powerful reason for investors’ increasing interest in private market allocations.

#### In the coming weeks, we will delve into more questions around LTAFs, how they will work, and how wealth managers might seek to incorporate them for private clients.

Sources:

[1] Source: The Investment Association, [Weaving private assets into wealth portfolios: Evolving structures to meet evolving needs](https://www.theia.org/sites/default/files/2021-12/IA_Goji_WhitePaper_PrivateAssetsinWealthPortfolios_Dec2021.pdf)

[2] Source: [Schroders, Schroders Institutional Investor Study 2022](https://mybrand.schroders.com/m/4eae38eb5825b0ed/original/SIIS22_Global-Private-Assets-Report_v11.pdf)

[3] Ibid


Private assets for wealth management clients: why, and why now?

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•	Short-term cash investments have grown in popularity since interest rates started rising in 2022.

•	In a slowing economy, interest rates tend to come down and the attractive rates on money market funds will likely decrease, while bond prices tend to rise. 

•	As rate increases slow and eventually stop, bonds with longer maturities may offer higher returns and less reinvestment risk. 

Over the past two years, many investors have watched yields surge on low-risk certificate of deposits (CDs), short-term bonds, and money market mutual funds and they have found they could earn nearly five per cent on their money without the ups and downs that come with investing in stocks.

Now, many of those CDs and other short-term vehicles that investors have put their cash into since interest rates began rising in May 2022 are maturing and owners face the question of what to do next.

Should they stay in cash or is it time to look at longer-term ways to help meet their investment needs with longer-maturity bonds?

### What is reinvestment risk?

While cash is great for maintaining liquidity and flexibility and avoiding the risk of losing money in a market downturn, it is not risk-free. Having too much of it creates its own risks. Possibly the greatest of these risks is that a portfolio with too much cash won’t earn enough over the long term to stay ahead of inflation and that it won’t provide enough buffer against inevitable downturns in stock markets.

Those risks may have seemed remote last year when investors bought that 1-year CD and the economy was growing slowly but steadily. Now though, according to Fidelity’s research, the economy is still growing but a slowdown may be near. That slowdown could come in the form of a “soft landing” in which economic activity diminishes but growth remains positive, or it could look more like a historically typical recession. No one can say for certain, and that increasing uncertainty is something investors should consider before reinvesting that money from their maturing short-term CD or bond.

### Then what?

Historically, when the economy slows and eventually enters a recession, interest rates come down. That means that those attractive interest rates on money market funds will also come down. It also means when the short-term CDs and bonds investors now own mature, investors may be unable to find new ones that pay as much as the old ones did.

Fortunately, investors do have an alternative to watching lower interest rates eventually reduce their portfolio’s ability to generate the income they need, and it does not involve investing in stocks. Longer-maturity Investment Grade bonds issued by companies with high credit ratings and by governments have historically delivered higher returns than either cash or stocks when the economy is slowing and interest rates are no longer rising. By investing in bonds with maturities of between 3 and 10 years, or in a bond mutual fund or ETF, with durations typically found in the US Aggregate Bond Index, investors can continue to earn the level of return they seek from their portfolio.

#### Total return 12 months after the end of the US Federal Reserve (Fed) rate-hike cycle
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What happens to bonds, cash, and interest rates in a slowdown?

As the economy slows, central banks typically cut interest rates in hopes of stimulating an economic recovery and yields on money market funds and other short-term cash destinations come down. While yields on newly issued bonds will eventually also come down along with rates, the interest, or “coupon” that a bond pays remains unchanged until the bond matures or is redeemed by its issuer. That makes it possible for investors in longer-maturity bonds to enjoy today’s relatively high yields well into the future, even after rates come down and short-maturity investment returns suffer. In fact, bonds are the only asset class since 1950 to produce double-digit gains during recessions, providing ballast against equity market declines.

Asset class performance by cycle phase (1950-2020, annualized nominal returns)
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Bond yields follow interest rates, and they also move in the opposite direction of bond prices. That means when rates and yields come down as they are likely to as the economy slows, bond prices are likely to rise. Because the total return that a bond delivers to its holder is a combination of the coupon yield and the bond’s price, the combination of potential rising prices in the future and relatively high yields in today’s market could deliver returns that are significantly greater than those available on short-term cash investments.

### Keeping the balance

Another potential downside that comes from not reinvesting maturing cash into longer-term bonds stems from the fact that cash has historically not provided as much protection as bonds from the declines in stock prices that often take place during economic slowdowns. In recessions, it is not unusual for stocks to decline by double-digit amounts. But when stocks have historically sunk, bond prices have often risen by double-digit amounts. While cash did not lose value like stocks during those periods, it also did not gain in value like bonds, which means that the overall value of an investor’s portfolio was more likely to be pulled down by sagging stocks if they had too much cash and not enough bonds.

### Time to move?

To be sure, cash still looks attractive right now. According to Fidelity’s research, the US economy remains in the “late” phase of the economic cycle, in which stock, bond, and cash returns historically have been very close to each other. In 2023, bond prices were also held back by tighter monetary policy. That may make it seem like the time for longer-term bonds has not yet arrived, but financial markets are constantly in motion, and they don’t tell investors what they may do next. That makes it nearly impossible to pick the perfect moment to reinvest into bonds, so investors who stay in cash may risk missing their opportunity.

Investors should keep looking at their goals and feelings about risk to create a mix of investments that is right for them. 

##### Important Information

##### This publication is prepared on a general basis for information only. It does not have regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive it. You should seek advice from a financial adviser. Past performance and any forecasts on the economy, stock or bond market, or economic trends are not necessarily indicative of the future performance. Views expressed are subject to change, and cannot be construed as an advice or recommendation. References to specific securities (if any) are included for the purposes of illustration only. This publication has not been reviewed by the Monetary Authority of Singapore. FIL Investment Management (Singapore) Limited (Co. Reg. No.: 199006300E). Fidelity, Fidelity International, and the Fidelity International Logo and F Symbol are trademarks of FIL Limited.


Why investors should consider locking in higher longer-term interest rates, while they last? 

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### 2023 in recap and expectations for 2024
The year 2023 has been marked by a series of surprises, from the slowing of China's recovery to US Treasury yields reaching 16-year highs, followed by a year-end rally alongside the Federal Reserve's (Fed) dovish pivot. Additionally, global political tensions have heightened due to the two ongoing wars. Simultaneously, the Fed's cash rate exceeding 5%¹ has led to record inflows into money market funds, diminishing the appeal of traditional bond strategies.

Looking forward to 2024, the global economic outlook suggests that returns on rates and credits will likely outpace those on cash, with a greater role for duration in portfolios. The once looming threat of Inflation to bond investments seems to have dissipated. Some of the record influx into money market funds could reverse, coupled with imminent rate cuts.  The Fed's dovish shift has also instilled optimism regarding a soft landing for the U.S. economy (see Figure 1). As the easing cycles broaden, credit growth is anticipated to rise accompanied by a decline in the debt service burden, propping up overall economic growth. Additionally, the easier funding conditions should mitigate distressed risks, which is conducive for the spread sectors.

**Figure 1: FOMC's Fed Funds Rate forecasts at Sep 23 and Dec 23 meetings (median values)**
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### Asia local currency bonds outlook

In the Asian context, our outlook has become more optimistic for both duration and currencies. Asia appears poised for a soft landing in 2024, with inflation slowing to align with central bank targets, and growth moderating without a collapse. Falling global bond yields could lead to greater capital inflows, and an easing in oil prices has produced further disinflation. Barring unforeseen supply-side shocks, we anticipate most headline CPI figures to return to Asian central bank targets by the end of 2024 as demand-pull inflationary pressures ease. Resilience is expected from large economies like India, Indonesia, China while North Asian technology exporters, particularly Korea and Taiwan, may benefit from AI-related semiconductor demand and an inventory restocking cycle.   

Easing cycles have kicked off in parts of LatAm as well as in Central and Eastern Europe (CEE) and this is set to further broaden to Asia. We expect regional central banks such as Indonesia to spearhead the rate cut cycle in the region. However, the timing of these monetary policy adjustments will depend on factors such as foreign exchange stability, geopolitical conditions, and the pace of the Fed's easing trajectory. There is a leaning towards earlier rate cuts, given the Fed's recent dovish pivot. Given the sharp rally in rates going into the end of 2023, we approach the addition of duration with caution. Our strategy is to capitalise on opportunities to extend duration at more favourable levels, anticipating a potential retracement in Q1 2024.

On China, we anticipate front-loaded policy support in the first half of 2024, leading to a stronger growth impulse during that period, followed by a relatively weaker growth trajectory in 2H 2024. Our expectation is that the Chinese government will aim for a GDP growth target of "around 5%²," relying on fiscal policy as the primary driver of growth support, but we deem the probability of aggressive policy stimulus as low.  Additionally, we project that monetary policy will remain largely accommodative, featuring modest easing measures such as Reserve Requirement Ratio (RRR) cuts and expected 10 basis points interest rate reductions, complementing pro-growth fiscal initiatives. With continued policy focus on the supply side suggests the domestic demand-supply imbalance may persist as a key challenge for the Chinese economy. The consequence of such imbalance has led to deflationary pressures, particularly on the consumer side, which may linger on, although 2024 CPI inflation rate is anticipated to show modest improvement, partly due to base effects. 

In the realm of currencies, we anticipate the potential for USD weakness against Asian currencies in 2024. Our preference leans towards regional currencies that exhibit improving current account balances, including the Malaysian ringgit, Thai baht, and the Korean won, along with those experiencing foreign inflows, notably the Indonesian rupiah and Indian rupee. While maintaining a positive sentiment, albeit less pronounced, we project the Singapore dollar and renminbi (RMB) to conclude the year in a middle-of-the-pack position, attributed to their expensive valuations and comparatively lower yields.

### Singapore bonds outlook

Likewise in Singapore, we anticipate a more favourable blend of growth and inflation in 2024. The initial half of the year is poised to experience an upswing in inflation, attributed to increases in GST, carbon taxes and other price increments including water and transportation fare. Nevertheless, a subsequent easing of inflation is probable in the latter half as the labour market undergoes a cooling phase. Turning to economic growth, Singapore's GDP is projected to increase in 2024 relative to 2023, primarily due to a turnaround in the manufacturing sector, despite a tempering in the momentum of tourism and domestic demand stemming from the post-COVID reopening theme.

In our baseline projection, we expect the SGD NEER to hold steady throughout 2024. While earlier-than-anticipated Fed cuts could mitigate the likelihood of additional tightening measures by the Monetary Authority of Singapore (MAS) to some extent, the prospect of MAS easing remains unlikely, given the still elevated core inflation. In other aspects, Singapore Government Securities (SGS) yields are anticipated to continue tracking US Treasuries, although we forecast SGS to outperform due to more manageable supply conditions. Unlike the supply shortage experienced in the first half of 2023, the long-dated SGS supply is better distributed throughout 2024. Consequently, we anticipate the SGS yield curve to steepen and normalise during the year. 

In other sectors, SGD swap spreads have exhibited a significant tightening in Q4, and we anticipate a partial retracement in Q1. Our preference remains for SGD credits over SGD statutory board bonds to enhance carry. Furthermore, we anticipate a redirection of some of the significant inflows into Monetary Authority of Singapore (MAS) bills in 2023 towards the SGD credit markets in 2024. Concurrently, the bond supply may be slow to catch up, creating a potentially favourable environment for credit investors.

### Asian credit outlook

In the landscape of Asian credit in 2024, several compelling factors continue to shape opportunities. That includes expectations of a faster pace of Fed cuts will likely drive further search for yield amongst fixed income investors. The positive performance in 2023³  and the still attractive carry, especially when compared to yield levels over the past two decades, are also likely to support fund flows. Some of the substantial funds directed to money markets in 2023 may shift towards credit markets. Simultaneously, the return of supply is anticipated to be gradual. Banks, eager to extend loans, combined with mostly lower local funding rates, might contribute to a delay in matching USD supply with the growing demand. The overall expectation is that net issuance across Asia will be negative in 2024, keeping technicals favourable. With primary market activity subdued, investors will need to turn to the secondary market, as demand makes a comeback.

Fundamentally, most defaults in the Asian high-yield space are believed to be behind us. The default rate in 2024 is widely expected to be lower than that of 2023, reigniting risk-taking and investor confidence (see Figure 2). Strong domestic liquidity in 2023 have facilitated Asian high-yield corporations to smoothly refinance bond maturities, a trend expected to persist in the new year. Broadly, the easier funding conditions should mitigate distressed risks, creating a favourable environment for high-yield investors. 

#### Figure 2: Asia HY defaulted amount and default rate – expected to decline further in 2024

![chart2.jpg](/uploads/chart2_0c8851a1e3.jpg)

Turning to the investment-grade market, US Treasury moves are anticipated to dominate returns in 2024. The year-end rally in US Treasuries has surpassed many Wall Street predictions for the end of 2024, revealing how the "Christmas" rally has caught analysts off guard. Current swaps market pricing indicates an expectation of around 150bps⁴  of rate cuts in 2024, potentially starting as early as March, contrasting with the Fed's dot plot projecting a 75bps rate cut in the same period. Similarly, we hold the view that the Christmas rally may have been overly exuberant, given our assessment that sustained declines in US Treasury yields are limited without evidence of a major slowdown in the US labour market. 

Consequently, we anticipate that US Treasury yields are likely to retrace from some of the aggressive rate cut pricing, particularly as activity data is unlikely to exhibit significant deterioration in the near term. We perceive limited risk-adjusted reward in extending duration at existing levels and would look for higher yields to consider adding duration, with room for the yield curve to steepen in 2024.  In this setting, our strategy is to optimise carry, particularly within the investment-grade space. We have deliberately kept some powder dry, refraining from operating at elevated risk levels in both credit and duration.  In our view, there remains an opportunity to augment risk, capitalising on the active primary issuance market in Q1 2024 and the potential pullback in US Treasury yields.

Looking further into 2024, as confidence about the relative resilience of the US economy builds, the yield curve is expected to steepen. Long-end yields could rise due to the possibility of US economic resilience and concerns about US Treasury supply re-emerging. Additionally, the year is set to bring a distinct change as the Bank of Japan (BOJ) is poised to phase out its negative interest rate policy, amidst at a gradual pace. This strategic move from the BOJ is likely to exert upward pressure on US Treasury yields, adding a significant dynamic to the evolving financial landscape.

Sector-wise, going into longer duration investment-grade USD debt such as China TMT and Indonesia quasi-sovereigns may deserve a fresh look, given the imminent Fed rate cuts. We are also drawn to the BBB bloc within the investment-grade space, anticipating potential spread compression against single A in 2024. Within the financial sector, bank senior bonds appear expensive, leading us to prefer subordinated debt. Additionally, we find the valuation of Asian non-bank financials to be attractive.

We are also actively seeking diversification in Developed Asia markets such as Japan and Australia particularly in Tier 2 financials. Our interest also extends beyond Asia to non-Asian exposure, such as in the Middle East economies, notably Qatar, Saudi Arabia, UAE, though we remain mindful of the rich valuations and geopolitical risks. We also have a favourable outlook for high-yield issuers from the large economies of Indonesia and India due to robust domestic demand and favourable onshore funding conditions. The Macau gaming sector is also on our radar, benefiting from a faster-than-expected revenue recovery. However, we acknowledge the consensus and crowded nature of these trades, placing a heightened emphasis on diversification. While remaining cautious in the China high-yield real estate sector due to the disappointing housing sales and the possibility of a prolonged property downturn.

### Summary

In summary, as we enter 2024, we are cautiously optimistic. We foresee a promising backdrop for returns in Asian rates and credits, given factors such as the softer stance on inflation, potential rate cuts, and the Fed's dovish posture. Our focus on Asia underscores opportunities amid potential capital inflows and accommodative policies. In the broader Asian credit landscape, we foresee positive prospects driven by anticipated Fed cuts and a gradual return of supply. 

Crucially, we maintain a watchful eye on potential risks that could reshape our outlook for 2024. On the positive side, we are closely monitoring upside risks, such as a more robust policy response from China aimed at stimulating growth, a swifter disinflationary trend surpassing the expectations of major central banks, potentially prompting earlier and more rapid rate cuts. Equally vital are the downside risks that are within our purview. These include uncertainties surrounding election outcomes, particularly the US election, and delayed effects stemming from previous rounds of aggressive (monetary) policy tightening, potentially resulting in unexpected pockets of financial stress. Another significant concern is the potential disruption to global markets as the Bank of Japan exits from negative interest rate policy.

¹ The Federal Reserve raised the Fed Funds Rate to between 5.00 % - 5.25% at its May 4 2023 meeting. The Fed Funds Rate is 5.50% as at Jan 19 2024.

² Fullerton estimates, January 2024.

³ The JPM Asian Credit index gained 7.0% (in USD terms) in 2023.

⁴ Source: Bloomberg, January 2024


Navigating Asia’s Fixed Income Markets in 2024

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Author: Valerio Baselli

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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Author: Kate Lin, CAIA

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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Author: Valerio Baselli

Jordan Belfort's legendary story can teach some useful things to keep in mind to avoid ending up like his former scammed clients

Oscar-nominated movie The Wolf of Wall Street starts with Jordan Belfort complaining that the year he turned 26, he made $49 million - because it was three shy of a million a week.

The work, based on a true story, also sparked a bitter controversy in the US between the association representing more than 1,500 victims defrauded by Belfort and the director Martin Scorsese. Indeed, the movie falls short when it comes to portraying the victims of Belfort’s scams.

Who knows how many people, leaving the cinema, have imagined themselves in the shoes of the young broker who became a billionaire in the early 90s? Beyond the golden patina of unbridled – and even a little irritating – luxury sported by the character played by Leonardo DiCaprio, shrewd investors should have left the room with some lessons well engraved in their minds. It is Belfort himself (who today holds seminars on sales strategy, one for Morningstar Australia in 2009) in his numerous essays and articles, written after prison, to point out these points, among others.

So here are seven lessons from the Wolf of Wall Street:

1. Be Wary of No-Name and Small-Time Operators
It is better not to entrust your money to an unknown broker or a consultant not affiliated with any consulting firm. There are serious professionals among the smallest, just as there are bad apples even in companies with a great tradition, but relying on someone who with no career track record or who you do not know well is a big risk to take.

2. Don't Stop at Their Own References
If you do decide to work with a little-known broker of consultant, you need to at least be sure you can trust who will manage your money. You cannot stop at the references passed by them directly, use independent ones.

3. Information on the Company Must be Solid and Clear
Before taking a decision it is always good to do some research. Reputable advisers do everything in the open and it should not be difficult to retrieve information or confirmations on the way they behave and do business. Those who advertise only on performance but remain opaque about everything else, starting with their investment process, are suspicious. If they have even a partially shady reputation, run the other way.

4. Ethics: Once Lost, Gone Forever 
When it comes to money, there's no in-between. If you pass the limit once, there is no turning back. “I didn't start out ethically bankrupt. I sold my soul a little bit at a time. I crossed over to the dark side through a series of tiny imperceptible steps,” says Belfort in his autobiography.

5. Beware of “Exclusive Groups”
The oldest technique in the world is to flatter: “My clients are exclusive, but you can be part of them.” Bernard Madoff did exactly that.

6. If it Seems Too Good to Be True, it Probably is 
Everyone is looking for the easiest and shortest way to reach their goal, and finance is no exception. When someone offers you a method or conditions that are too good to be true, you need to ask yourself twice as many questions and do twice as much research. Again, the mind-boggling returns offered by Madoff for years are a perfect example.

7. Financial Conduct Authorities Have Their Limits
Regulatory and supervisory authorities are very important, but blindly relying on them is still a bit naive. Investors must be the first controllers of themselves and the operators they deal with.

Particularly worrying in this sense is the testimony of Belfort on the controls suffered for years by the Security and Exchange Commission. “The agency itself is just all wrong. It's understaffed and under-capitalized. It needs to be dismantled and rolled into a more effective government agency” – he says – “In the Stratton Oakmont days, the SEC sent four teams of investigators to us in two years. They were kids. They would come in and they knew nothing about the securities business. Back then I went to great lengths to make my activities appear legitimate. We'd give them tens, hundreds of thousands of trading tickets, and while they were busy looking for the smoking gun, we made mountains of money.”



7 Lessons From the Wolf of Wall Street

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**Sandy Kaul**
Head of Digital Assets and Industry Advisory Services
Franklin Templeton


## Introduction
I am in the process of completing a three-part series of papers about technology megatrends impacting society and what to expect with the Web3 revolution. This article recaps the innovation cycles that gave rise to these megatrends featured in my first paper—“Evolution of commercial technologies and impact on business delivery.” It also offers a preview of the five megatrends that I will discuss in more detail in my second paper coming out in the first quarter of 2023.


## Tech-driven innovation cycles create new business approaches
Since the 1960s, commercial enterprises have benefited from a rapid evolution in the technol- ogies available to them—adapting many innovations originally designed for the military and previously deployed only to large universities. As these new commercial technologies have emerged, they alter what is possible for businesses and their customers. The push to adopt new capabilities requires enterprises to rebuild their delivery infrastructure. This cycle of new technology changing business abilities, and thus prompting upgrades to an organization’s platform, has now happened three times since the 1960s, and we are on the verge of a fourth innovation cycle.


### Waves of Commercial Technology Innovation
![Waves of Commercial Technology Innovation.png](/uploads/Waves_of_Commercial_Technology_Innovation_82de1f594a.png)

The first cycle, automation, was when computers became more compact, resulting in more efficient business tasks and more centralized data processing. In the 1970s, the second cycle of digitization began with the emergence of personal computers as well as commercial off-the-shelf software. Networking also progressed, with the internet becoming publicly available in the late 1980s and websites exploding by the early 2000s. We are currently finishing up the third cycle, virtualization, that features the introduction of cloud computing, APIs and big data. These new technologies have allowed for the embedding of our social interactions into digital networks and have fostered new commercial platforms that allow individuals and businesses to interact at-will across a range of business activities.

The fourth cycle on the horizon is decentralization, where peer-to-peer interactions shift away from intermediated platforms to commercial protocols where users and resource providers are incentivized to share in the ownership of the networks they use most frequently and participate in the financial rewards those networks generate. For more in-depth information on these four cycles, please explore our recent in-depth report “Evolution of commercial technologies and impact on business delivery.”


## Megatrends being enabled by tech-driven innovation
As these tech innovation cycles unfold, the impacts of continual innovation are becoming more cumulative—resulting in the emergence of five megatrends that reflect broader changes about how society operates. An introduction to these megatrends is provided here, and a more in-depth exploration of these trends and how they are likely to alter society will be forthcoming in our new report due out in first quarter (Q1) 2023.

These megatrends have already profoundly changed the power that individuals wield in society and the value drivers of commerce. The emerging fourth cycle of innovation might witness the culmination of these changes and prove to be the most disruptive yet. Indeed, society may be on the cusp of an even more dramatic evolution than the advent of the internet.

#### Megatrend #1: Democratization of access
The first megatrend relates to how the rails of commerce are becoming increasingly democra- tized. Commerce has become more open, offering individuals and enterprises unprecedented access and control over their buying and selling channels.

•	During the age of automation, proprietary computer systems were built to enhance the efficiency of commerce—increasing the velocity at which transactions could take place and allowing for economies of scale in terms of pricing.

•	The digitization era began to open these proprietary systems, exposing processes and data that had only been available to employees and allowing individuals to access and arrange their own commercial transactions via the web. For example, buying airplane tickets directly instead of using a travel agent.

•	With virtualization, processes have moved beyond the company perimeter and are becoming distributed via platforms and networks that allow individuals and businesses to not only access and initiate transactions, but to contribute and leverage their own resources. For example, allowing others to rent your home on Airbnb.

•	As the decentralization cycle takes hold, these commercial platforms are evolving into commercial protocols. Just as individuals can call up a website using web protocols, such as HTTP, new offerings will allow individuals to access process-focused protocols via the web that allow them to initiate their own contracts, create and collateralize their own assets and earn financial incentives that position them to be owners of the networks they use most frequently.

#### Megatrend #2: Decomposition of business value
The second megatrend shows how the drivers of business value are changing, moving from the in-house manufacture and distribution of tangible goods that can be measured by capital expenditures to a more intangible set of differentiators that increasingly rely on a broader ecosystem to fulfill key processes.

•	Automation placed the focus on enhanced manufacturing abilities, with enterprises able to quantify how much they were investing to improve their throughput and scale.

•	A shift away from tangible to intangible enterprise value began in the digitization cycle as automation shifted from the manufacturing plant to the front office. This allowed for a surge in the creation of innovation and intellectual property—the delivery of which
became a differentiator—thus positioning knowledge-based services as a new value driver.

•	In the current age of virtualization, business value is increasingly tied to powerful platforms that drive network effects. Successful businesses either foster or rely on these network effects by connecting into the ecosystems they enable, allowing the platform provider to fulfill key parts of their business process.

•	As the coming decentralization cycle unfolds, affiliations with a network are likely to evolve with processes from diverse providers becoming embedded into the network, as enter- prises distribute their business value by turning their processes into open-source code that can be accessed by developers and inserted into any relevant transaction flow.

#### Megatrend #3: Expanding power of the crowd
The third megatrend focuses on evolution in the communication channels that individuals utilize to share their experiences around commercial transactions and how use of these channels has given them a voice that allows them to impact, and perhaps ultimately shape, business offerings and messaging.

•	Interactive voice technologies and call centers emerged to support consumers in the automation cycle, allowing them to report feedback and concerns, but in a one-on-one manner that left consumers uncertain about the impact of such engagement.

•	The emergence of bulletin boards, online forums and blogs during the digitization cycle provided consumers asynchronous feedback mechanisms that could be viewed and shared among many potential and actual buyers, as well as viewed by targeted enterprises. This marked the first steps toward the emergence of a crowd voice.

•	Social media—the hallmark of the virtualization cycle—has created a synchronous feed- back loop between consumers and commercial enterprises, elevating in many instances the views and opinions of individuals over the official brand messaging and advertising of the company itself and encouraging the engagement of a new class of influencers to shape opinions.

•	The coming decentralization cycle marks the emergence of a peer-to-peer economy and directly involves consumers via new governance processes that incentivize the most active participants of a network to become owners and a part of the community that sets the business strategy for the commercial protocol.

#### Megatrend #4: Institutionalization of the individual
Institutions use their organizational resources to pursue long-term goals for their underlying members, accessing many financial and social opportunities to achieve their success. The fourth megatrend explores how individuals have been gaining access to these same levers to optimize the use of their personal resources to meet their own long-term goals.

•	The automation cycle supported a massive improvement in record-keeping that allowed for the creation of the credit card that could be issued at scale—allowing individuals to purchase items on credit and extend their buying power, just like institutions.

•	Digitization provided individuals a powerful new tool—the personal computer—and created new channels for individuals via the internet, allowing them to access and engage experts and transact directly with suppliers via their online websites, giving individuals more abilities that were previously reserved solely for institutions.

•	Virtualization has allowed individuals to become part of far-reaching online communities and commercial platforms, which in turn has allowed them to shape their own personal brand via social media, connect to allied networks, and utilize their personal assets to earn revenues—all activities that institutions have traditionally pursued.

•	Decentralization should close any remaining gaps between individuals and institutions as participants in commercial protocols will be able to raise capital directly by issuing NFTs that encapsulate their personal assets and by using their broader set of digital holdings as collateral to borrow against, loan or stake without needing the approval or facilitation of an intermediary.

#### Megatrend #5: Quantification of behavior
The final megatrend explores how each tech-driven innovation cycle has resulted in the creation and storage of a growing set of transactional and process-related data and how the mining of these data have helped to enhance commercial outcomes and become increasingly targeted and personalized.

•	Executive information systems emerged in the automation cycle, pulling together informa- tion from all the various branches and departments of an enterprise to give the C-suite insights into their business activities to enhance their decision-making.

•	Growing use of specialized systems in the digitalization cycle—such as customer relation- ship management, enterprise resource management and point-of-sale transaction processing—allowed information to be gathered at a process level and analyzed to enhance service delivery and improve outcomes.

•	Powerful new data processing techniques and artificial intelligence have been deployed in the virtualization cycle to target how individuals behave at each stage of a process and compare their activity to actions taken by similar cohorts with the goal of tailoring a user’s experience and increasing the likelihood that the user will engage or transact.

•	The decentralization cycle is likely to see algorithms extend beyond how individuals engage in a process to modeling the individual themselves across multiple processes and tying together insights about their activities and behavior to build customized offerings that are based on the individual’s unique profile.


### Impact on society
Collectively, the megatrends previewed in this piece have been gaining ground as each new tech-driven innovation cycle unfolds. The megatrends emerged as the impacts of automation were being fully understood and transitioning to digitization. They became amplified as digitization progressed through the 1980s into the early 2000s and virtualization took hold, and they are likely to find their fulfillment in the coming cycle of decentralization.

If the megatrends progress as we anticipate, in the space of 60 or so years, consumers will have gained tremendous agency and become powerful drivers of commercial activity able to use their resources collectively or as individuals to direct and manage their own lives and livelihoods; while at the same time, commercial enterprises will have shifted from being powerful monoliths that manufactured and distributed their own goods and services

#### Development of Megatrends Across Innovation Cycles
![DEVELO~1.PNG](/uploads/DEVELO_1_4c735087e4.PNG)

to become increasingly enmeshed in a broad networked ecosystem that brings together vast resources and efficiencies in a manner increasingly designed to appeal to the end-user’s experience.

These concepts will be explored in more depth in our upcoming piece due to be released in Q1 2023.





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Evolution & revolution: Five technology mega- trends impacting society

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![SGX ESGenome_800 x 250px.jpg](/uploads/SGX_ES_Genome_800_x_250px_fac164bdf9.jpg)

[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

Asian Equity Insights: Asia’s rise on the global stage – emerging opportunities and trends

Fullerton’s Carbon Action Strategy

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

Sustainable Asian Cities Bond Strategy

A joint initiative of IMAS and LIA