Ahead of the Curve covers developments that may impact the behavior and portfolio positioning of institutional investors. Take a closer look at events in the ever-changing regulatory, legislative and investment markets to determine how they may impact you.
Almost half of 800 institutional investors and corporate executives responding to a recent survey believe that the current economic environment provides more opportunities than usual to outperform the market.
The survey, conducted by The Economist Intelligence Unit, also found respondents believe that asset selection will be a crucial determinant of investors’ returns over the coming year.
While the United States is expected to make stronger economic contributions to global economic growth than it has in recent years, most respondents (66%) said that emerging markets, especially India, China and Brazil, offer the best prospects for economic growth. Critically, many are concerned that investors may be putting too much faith in these markets for stable growth, potentially causing them to overheat.
Favored industries include those involving commodities, such as oil and gas (45%); agriculture and agribusiness (38%); and mining and metals (26%). However, they too are seen as at risk of overheating. Political and economic instability resulting from higher food and commodity prices, as well as unrest in the Middle East, are also concerns weighing on emerging markets.
The popularity of defined contribution (DC) plan loan features could have a detrimental effect on participants’ ability to adequately save for retirement, according to a recent survey.
Loan features are available in almost all DC plans and are used heavily by plan participants. Almost 28% of active participants had a loan outstanding at the end of 2010, according to the recent Aon-Hewitt report, “Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income.” Annually, the number of participants taking withdrawals increased to near 7% in 2010. The reasons most frequently given for withdrawals include eviction, education or medical bills.
Complete cashouts have the most detrimental effect on future retirement income. Participants who cash out their plans reduce their total retirement income from 11% to as much as 67%. Participants further damage their savings by ceasing deferrals during the repayment period, eroding their retirement income by as much as 13%.
Proposed solutions include restricting the balance available for in-service withdrawals, imposing restrictions on hardship withdrawals, imposing automatic restart after a suspension and reducing the number of loans allowed as well as the loan balance available. Employee education and communication efforts to promote the merits of the plan are also important elements of the solution.
Members of the Association of Southeast Asian Nations (ASEAN) are increasingly important contributors to Asia’s growth and present new opportunities for both local and international banks, according to a recent McKinsey Quarterly article.
These countries are increasingly relying on capital markets and investment banking and are projected to grow faster than the rest of Asia in terms of equity and debt, capital markets and mergers and acquisitions. The article, “Capturing the Investment Banking Opportunity in ASEAN,” states that in the next five years the GDP growth rates of Vietnam, Indonesia and Malaysia will each exceed those of Japan and Australia, propelled by increased infrastructure investment.
In order to capitalize on these developments, local banks should focus on developing five core capabilities, including the coverage model, account planning, research, cross-border capabilities and the talent proposition. Failure to do so would put them at risk of losing a substantial share of their investment-banking franchise to larger international banks. International banks are advised to increase their working knowledge of Asian banking systems, including Islamic finance, and to increase their local presence.