Market Watch

Secular investing looks ahead – beyond just the next few years – to investigate the themes and directions that will shape the future world. In the flurry of day-to-day market turbulence it is often easy to get side tracked by short-term noise and lose sight of what is important in the long game. In this article, we explore three key themes which may provide exciting investment opportunities in the future.

1. Education

With the future likely to be more dependent on an increase and improvement in technology and new concepts, education is likely to be a key growth area. This will apply not only to school student and university graduates but also to the working population who will be required to keep their skills up-to-date or acquire new skills on an ongoing basis. The increase in educational requirements will not just apply to content but also in the delivery mechanism. To some extent, the internet has negated the need for a centralised education system and has allowed a more flexible structure in terms of physical location as well as timing. These delivery methods are still in their infancy and it is expected that new methods of delivery will be an important step forward.

2. The energy revolution

A growing global population, coupled with an insatiable demand for energy, will mean that new sources of energy will be a major growth area. Although companies specialising in alternative energy production currently account for only around 0.1% of global market capitalisation, this is expected to undergo a sea change in the coming years as the world shifts to a low-carbon economy. In addition, 80% of energy is lost somewhere along the value-chain so there is a vast opportunity for efficiency improvement. Increased battery technology is also likely to play a key role in supporting the new technology.

3. Ageing demographics

The world is getting older. Falling birth rates and improvements in health care have meant we are all living longer. Looking forward, this has implications for the pharmaceutical, medical and health care industries, especially where this can add to the quality of life and not just the nominal age at which we die. The increase in lifespan is also starting to have an effect on the structure of the investment industry, with a greater number of older individual investors looking for a stable stream of income. This has potential implications for company growth prospects as higher risk / higher reward strategies are replaced by ‘safer’ options. This could potentially inhibit growth and innovation if companies avoid risk in favour of perceived stability. Longevity risk will also come into play as people retire from the workforce.

We also believe that the impact of obesity, technological change and urbanisation will play an important role over the coming years.

How does secular investing differ from traditional approaches?

Today, many diversified funds are centred around benchmarks, which represent a group of securities that are constructed to represent a particular sub-set (sector, asset class or geography) of the investible universe. A fund’s performance is often judged against these benchmarks. Although there is utility in having such benchmarks – they provide a focus and allow for objective comparisons – they may not be appropriate for all investors. Secular investing offers an alternative approach. It aims to identify companies that are exposed to themes which offer solutions to the challenges of a rapidly transforming world.

Final thoughts

For those investors who are prepared to take the long-term view and who want to be suitably placed in the next 10, 20 or even 30 years, it’s important to see through the short-term mist; paying less attention to short-term ups and downs in order to capitalise on emerging investment themes and opportunities.

About the Author

Andy joined AMP Capital in February 2012 as a Portfolio Manager/Analyst within the Fundamental Equities team, and has more than 12 years’ investment experience in Europe and Asia Pacific as a senior buy and sell side equity analyst and strategist. Andy holds a Bachelor of Science in Economics (first class honours) from Kings College London, and is a CFA charterholder.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

Each year, billions of dollars are invested into social programs that aim to address some of the world’s biggest challenges, from a lack of access to education, healthcare, food and/or water through to natural disasters and much more. As such, social investing (also known as impact investing) has become topical with a recent report suggesting that social infrastructure investing using a combination of government and private resources leads to better aggregate results¹. Given the hype, we explore some evolving themes and trends and examine what the future is likely to hold for this investment segment.

What is social investing?

Social investing, henceforth SI, is an investment whose financial return is aligned to a measurable social or environmental benchmark, often referred to as a Key Performance Indicator (KPI). These investments may be made in either developed or emerging economies often, although not exclusively, in association with government bodies. Such arrangements are known as Public Private Partnerships (PPPs).

Exploring three recent developments

Traditional PPPs with elements of social outcome

Traditional PPPs involved the contracting out of specific secondary operational functions to the private sector, such as security, cleaning and building maintenance. These contracts were usually functionally based and had no direct linkage to social outcomes (which were considered the sole responsibility of government). Recently, there has been a move towards developing PPPs which incorporate some elements of social outcomes. An example of a traditional PPP with elements of social outcomes is the Auckland South Corrections Facility, due for completion in May 2015. This initiative between outsourcing and services organisation Serco and the New Zealand Government and will operate using key benchmarks of prisoner rehabilitation, reintegration and reduced offending.

Traditional PPPs with combined primary and secondary responsibilities

Recent developments in the PPP sector have seen a move towards private enterprise providing not only secondary services but also delivering core services which have principally been the responsibility of governments, such as the provision of healthcare services. These are linked to quality service payments, controlled by arrangements which reduce payment for non-performance. For example, the Northern Beaches Hospital in Sydney, Australia will operate under such an arrangement; the tender partner for this initiative is expected to be announced in late 2014.

Social impact bonds

Social impact bonds represent a recent modern development in SI with clear definable KPIs. These bonds are primarily issued to raise money for the development and running of government social initiatives and programs such as prisoner rehabilitation. Returns are linked to measurable KPIs such as the reduction in re-offences. If the set targets are not met during a defined period then the bond does not pay a coupon.

Final thoughts

We believe that PPP arrangements, when linked to measurable outcomes, can allow both public and private parties to optimise results by utilising their comparative advantages. The driving philosophy behind this is that there is an optimal combination of government and private alignment in social projects that will achieve the desired result. There is no one-size-fits-all model for social programs and outcomes, rather the combination of services is project-specific.

Many of those who participate in social investing do so for more than purely financial gain. However, aside from the ‘feel good’ aspect of social investing, such investments typically have provided strong stable returns from high-quality counterparties with defined downside risk. With little or no correlation to traditional asset classes, social investing can form part of a well-diversified portfolio.

We expect to see further developments in social investing in the coming years.

¹KPMG, Sustainable insight: Unlocking the value of social investing, released 28 May 2014

About the Author

Julie-Anne Mizzi is the Investment Director for the AMP Capital Community Infrastructure Fund with over 20 years’ experience in asset management experience gained in Australia and the U.K.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

Each year, billions of dollars are invested into social programs that aim to address some of the world’s biggest challenges, from a lack of access to education, healthcare, food and/or water through to natural disasters and much more. As such, social investing (also known as impact investing) has become topical with a recent report suggesting that social infrastructure investing using a combination of government and private resources leads to better aggregate results¹. Given the hype, we explore some evolving themes and trends and examine what the future is likely to hold for this investment segment.

What is social investing?

Social investing, henceforth SI, is an investment whose financial return is aligned to a measurable social or environmental benchmark, often referred to as a Key Performance Indicator (KPI). These investments may be made in either developed or emerging economies often, although not exclusively, in association with government bodies. Such arrangements are known as Public Private Partnerships (PPPs).

Exploring three recent developments

Traditional PPPs with elements of social outcome

Traditional PPPs involved the contracting out of specific secondary operational functions to the private sector, such as security, cleaning and building maintenance. These contracts were usually functionally based and had no direct linkage to social outcomes (which were considered the sole responsibility of government). Recently, there has been a move towards developing PPPs which incorporate some elements of social outcomes. An example of a traditional PPP with elements of social outcomes is the Auckland South Corrections Facility, due for completion in May 2015. This initiative between outsourcing and services organisation Serco and the New Zealand Government and will operate using key benchmarks of prisoner rehabilitation, reintegration and reduced offending.

Traditional PPPs with combined primary and secondary responsibilities

Recent developments in the PPP sector have seen a move towards private enterprise providing not only secondary services but also delivering core services which have principally been the responsibility of governments, such as the provision of healthcare services. These are linked to quality service payments, controlled by arrangements which reduce payment for non-performance. For example, the Northern Beaches Hospital in Sydney, Australia will operate under such an arrangement; the tender partner for this initiative is expected to be announced in late 2014.

Social impact bonds

Social impact bonds represent a recent modern development in SI with clear definable KPIs. These bonds are primarily issued to raise money for the development and running of government social initiatives and programs such as prisoner rehabilitation. Returns are linked to measurable KPIs such as the reduction in re-offences. If the set targets are not met during a defined period then the bond does not pay a coupon.

Final thoughts

We believe that PPP arrangements, when linked to measurable outcomes, can allow both public and private parties to optimise results by utilising their comparative advantages. The driving philosophy behind this is that there is an optimal combination of government and private alignment in social projects that will achieve the desired result. There is no one-size-fits-all model for social programs and outcomes, rather the combination of services is project-specific.

Many of those who participate in social investing do so for more than purely financial gain. However, aside from the ‘feel good’ aspect of social investing, such investments typically have provided strong stable returns from high-quality counterparties with defined downside risk. With little or no correlation to traditional asset classes, social investing can form part of a well-diversified portfolio.

We expect to see further developments in social investing in the coming years.

¹KPMG, Sustainable insight: Unlocking the value of social investing, released 28 May 2014

About the Author

Julie-Anne Mizzi is the Investment Director for the AMP Capital Community Infrastructure Fund with over 20 years’ experience in asset management experience gained in Australia and the U.K.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

Global shares have been going through a bit of a correction. Apart from worries about global growth, a range of ‘event risks’ have been playing a role: the Ebola scare, Iraq’s deteriorating security situation and a terrorist threat posed by Islamic States (IS), Hong Kong’s extended pro-democracy protests and Ukraine’s stalemate with Russia. Here is a brief overview of the current geopolitical issues in the spotlight.

Ukraine/Russia

The Ukraine crisis may be heading towards a resolution of sorts, with the Ukrainian parliament granting a degree of autonomy to the eastern regions currently in conflict. There may still be more to go before the conflict is resolved but – with Russia describing the move as positive and the conflict failing to escalate – it appears that Ukraine is starting to recede as an issue for investment markets.

Middle East

The conflict with IS in Iraq and Syria is still hotting up. So far, global oil supplies are not under threat; oil prices are running lower than when the conflict first hit the headlines. Increasing prospects for the deployment of ground forces in Iraq by the US and its allies and the threat of IS-related terrorist activity (as recently seen in Canada) have the potential to upset investor confidence. In terms of the latter, the experience with Al Qaida-related attacks last decade is of relevance to investors with the main lesson being that the impact of such attacks on financial markets tends to be short-lived.

Ebola

The risk around Ebola has clearly risen with cases in the US and Europe. Our base case remains that it should be easier to control its spread in the US and in other western countries, given modern medical facilities and higher hygiene standards. As such, it will remain largely contained to Africa but with short-term bouts of share market volatility around Ebola scares. If Nigeria can quickly get it under control (it has now been declared Ebola-free) then Western countries should be able to contain the issue. However, as we saw in Hong Kong and Singapore with Severe Acute Respiratory Syndrome (SARS), the main economic threat is a hit to consumer confidence and spending. US consumer confidence appears to have been marginally, but it is worth keeping an eye on this.

Hong Kong protests

The protests in Hong Kong recently are certainly a risk to China. In saying this, there is a good chance that the protesting will peter out as the people of Hong Kong grow frustrated at the disruption these demonstrations pose to their ability to go about their business. This looks to be happening already.

The Catalonian independence referendum

Common sense prevailed in Scotland and the ‘No’ vote won the referendum on independence. This was good news for UK including Scottish assets, and more broadly for the Eurozone as other pro-independence movements like the Catalonians in Spain weren’t given the encouragement a Scottish ‘Yes’ vote might have provided.

Most geopolitical uncertainties flare-up with much media fanfare only to then fade with little impact globally. That said, the abovementioned geopolitical issues are worth keeping an eye on as they could remain a source of volatility in the period ahead.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

Global shares have been going through a bit of a correction. Apart from worries about global growth, a range of ‘event risks’ have been playing a role: the Ebola scare, Iraq’s deteriorating security situation and a terrorist threat posed by Islamic States (IS), Hong Kong’s extended pro-democracy protests and Ukraine’s stalemate with Russia. Here is a brief overview of the current geopolitical issues in the spotlight.

Ukraine/Russia

The Ukraine crisis may be heading towards a resolution of sorts, with the Ukrainian parliament granting a degree of autonomy to the eastern regions currently in conflict. There may still be more to go before the conflict is resolved but – with Russia describing the move as positive and the conflict failing to escalate – it appears that Ukraine is starting to recede as an issue for investment markets.

Middle East

The conflict with IS in Iraq and Syria is still hotting up. So far, global oil supplies are not under threat; oil prices are running lower than when the conflict first hit the headlines. Increasing prospects for the deployment of ground forces in Iraq by the US and its allies and the threat of IS-related terrorist activity (as recently seen in Canada) have the potential to upset investor confidence. In terms of the latter, the experience with Al Qaida-related attacks last decade is of relevance to investors with the main lesson being that the impact of such attacks on financial markets tends to be short-lived.

Ebola

The risk around Ebola has clearly risen with cases in the US and Europe. Our base case remains that it should be easier to control its spread in the US and in other western countries, given modern medical facilities and higher hygiene standards. As such, it will remain largely contained to Africa but with short-term bouts of share market volatility around Ebola scares. If Nigeria can quickly get it under control (it has now been declared Ebola-free) then Western countries should be able to contain the issue. However, as we saw in Hong Kong and Singapore with Severe Acute Respiratory Syndrome (SARS), the main economic threat is a hit to consumer confidence and spending. US consumer confidence appears to have been marginally, but it is worth keeping an eye on this.

Hong Kong protests

The protests in Hong Kong recently are certainly a risk to China. In saying this, there is a good chance that the protesting will peter out as the people of Hong Kong grow frustrated at the disruption these demonstrations pose to their ability to go about their business. This looks to be happening already.

The Catalonian independence referendum

Common sense prevailed in Scotland and the ‘No’ vote won the referendum on independence. This was good news for UK including Scottish assets, and more broadly for the Eurozone as other pro-independence movements like the Catalonians in Spain weren’t given the encouragement a Scottish ‘Yes’ vote might have provided.

Most geopolitical uncertainties flare-up with much media fanfare only to then fade with little impact globally. That said, the abovementioned geopolitical issues are worth keeping an eye on as they could remain a source of volatility in the period ahead.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

Investors plunging into residential property have been warned by the Reserve Bank of Australia (RBA) that they are taking on risks when prices are already high and growth in rents has slowed.

Following October’s Board meeting, the RBA indicated that property prices had continued to grow into the September quarter.

What’s been driving prices?

The rise in house prices over the last two decades – most recently in Sydney – can be attributed to two key factors:

• Low interest rates: A sustained period of low interest rates has enabled Australians to borrow more for a given level of income. Consequently, this higher borrowing has allowed Australians to pay more for homes.

• Undersupply: Restrictive land supply policies coupled with high stamp duty and infrastructure charges have subdued the supply of real estate in Australia. Reflecting this, residential vacancy rates remain relatively low.

Please note: While foreign and SMSF buying is playing a role in some areas, it can be argued that their overall impact is small.

Tightening the reins: Macro-prudential policies are being considered

The RBA has indicated that it is in discussion with the Australian Prudential Regulation Authority (APRA) on steps that could be taken to ensure sound lending practices are maintained with a focus on investors.

This could involve limits on loan-to-valuation ratios, or more likely, measures that would force banks to either put aside more capital for loans to property investors or impose tougher tests when granting loans. We expect to hear more on these measures in the months ahead.

What about interest rates?

Despite strong gains in property prices, the RBA has indicated that interest rates will remain unchanged for now, adding that the most prudent course forward would likely be a period of rate stability.

At the moment, the RBA is reluctant to raise rates given uncertainty regarding the rest of the economy and the risk a rate hike would put upwards pressure on the Australian dollar, which is still too high for the RBA’s liking.

Final thoughts

We expect that investors could see further gains in house prices in the short-term, but at a more modest pace. This trend is likely to continue until the RBA starts to raise interest rates (possibly around mid-next year).

As a medium-term investment, residential property currently looks somewhat less attractive. The total return over the medium-term is expected to be around 4 to 5% per annum. This is currently lower than shares and commercial property.

In saying this, over the very long-term (almost 100 years) residential property has provided a similar return as Australian shares; both have delivered around 11 to 11.5% p.a. to investors since the 1920s.

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.