FIS 2020: The policy response

FIS 2020 will discuss how the unprecedented government stimulus in response to the pandemic could affect investor returns and specific allocations. Areas of concern include a sharp rise in zombie companies kept afloat by government support. Elsewhere, delegates will discuss how changing work and retail habits will impact real estate.

Investors don’t know what the future will look like. Instead, asset owners should focus on what it could look like and prepare for a range of possibilities, says Geoffrey Rubin, senior managing director and chief investment strategist at Canada’s $420 billion CPP Investment Board. He says the impact of the extraordinary monetary and fiscal intervention of recent months is front of mind.

“It’s the first thing we need to grapple with,” says Rubin, who will also speak at FIS 2020 next week. Its implications will reverberate across different time horizons with short-term relief likely to give way to substantial, longer-term challenges, he says.

Opportunity in the policy response

One area of opportunity in the policy response is the fresh momentum it has given the energy transition. For example, Germany’s €130 billion stimulus package, which Chancellor Merkel described earlier this month as “charting Germany’s course for the future” prioritises the green economy visible, for example, in a huge expansion of electric car charging infrastructure.

“We are sure that these matters are going to be extremely relevant in our mandate decisions,” says Ignacio Javier Hernández Valiñani, who heads up Spain’s largest corporate pension fund, the €5.8 billion ($6.5 billion) pension fund for CaixaBank employees. “The change is going to be faster than we originally thought.”

The fund’s recent decision to introduce ESG indexes in its benchmark have stood it in good stead during the crisis, he adds. “These ESG references behaved much better in this market than traditional versions. We think there is a big path ahead for sustainability, and will continue our focus on that subject.”

Risks

Another area the stimulus will have profound implications is distressed debt. Here FIS delegates will hear from Victor Khosla, founder, VSP Global on the perils and opportunities that lie ahead in an asset class where investors, starved of yield from safer government bonds, have increased their allocations in recent years.

Similarly encouraged by low rates, many riskier companies have gorged on cheap debt for the last decade. Now they’ve also tapped unprecedented government support, yet this won’t address the fact many face insolvency as their debts overwhelm collapsing revenues. Vulnerable sectors include travel or those facing disrupted supply chains, areas where rating agencies are sounding the alarm. As Paloma San Valentin, managing director for the Americas at Moody’s flagged, there is now a “growing risk to corporate credit quality around the world.” As for opportunities, they lie with well-capitalised lenders with a long-term focus and companies with strong balance sheets.

Real estate

Another asset class facing huge change is real estate as the pandemic accelerates trends in how we work, live and shop. FIS 2020 will hear from Jon Cheigh, CIO at Cohen & Steers on how to best combine listed and unlisted real estate opportunities and balance liquidity in the years ahead.

“Demand for shopping mall space will reduce and demand for logistics space will increase probably, but what if we find a very satisfactory cure to the virus?” asks Olivier Rousseau, executive director of Fonds de reserve pour les retraites, France’s €32.7 billion pension reserve fund, who is also on the program. “A sure bet is that demand for super-fast internet connectivity will increase faster than we could expect.”

Elsewhere, challenges in real estate have made some investors wary.

“Today’s situation may increase the choice available in this kind of asset, but we want to be sure that investment doesn’t increase our risk profile. Given its illiquid nature, we don’t want to rush in just because the pandemic has temporarily increased the number of good opportunities,” says Spain’s Hernández Valiñani.

FIS 2020’s unpicking of the policy response will cover other key considerations too. Delegates will hear how the response could herald a shift to EU fiscal union. Germany and France have joined forces to push for an EU recovery fund, so that money raised by the European Commission borrowing from the capital markets goes to support EU spending, rather than the more typical loans to national governments.

Elsewhere, experts will discuss the implications of China spending much less on its rescue than others. According to the IMF’s fiscal tracker, China’s COVID-19 support packages (including spending, loans and guarantees) amounted to only 2.5 per cent of its GDP by April, compared to 34 per cent for Germany, 20.5 per cent for Japan and 11.1 per cent for the US.

The Fiduciary Investors Symposium Digital 2020 on June 23 and 24 will look at the extreme uncertainty of the global economy including the changing geopolitical dynamics and the potential unravelling of globalisation; the unprecedented fiscal and monetary policy responses and the implications for investments; how investors are positioning portfolios and managing short and long term risks; supply chain risks and responsible capitalism; what a sustainable recovery looks like and how investors can ensure it happens.

Asset owners can register for the Fiduciary Investors Symposium here.