The investment implications of - Mercer
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the investment implications of
April 23 2020
Kylie Willment Dr Harry Liem
Chief Investment Officer, Pacific Director of Strategic Research
and Head of Capital Markets, Pacific
Yaying Dong Helga Birgden
Market Strategist Global Business Leader, Responsible Investments
Presenters
Kylie Willment Yaying Dong Dr Harry Liem Helga Birgden
Chief Investment Officer, Pacific Market Strategist Director of Strategic Research and Global Business Leader, Responsible
Head of Capital Markets, Pacific Investments
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.
Not out of the woods yet
New Zealand daily new cases India daily new cases
Australia daily new cases Singapore daily new cases
Worldometer, Mercer
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.
Two curves to flatten
Starting the Descent
Nearing the Peak
Worldometer, Mercer
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.
Oil: A wake up call
WTI futures curve Oil capex across major regions
Source: BIS, Bloomberg, Mercer
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.
Market sentiment - two distinct outcomes
Forward PE ratio S&P 500 10 year bond yields
Source: BIS, Bloomberg, Mercer
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.
“The Big Picture”: Strategic research
“Investment Wisdom for The Digital Age”
• Lower returns, focus on risk management, regulation,
disruption, disintermediation
“Themes for 2020”
• 1. How long have you got? Focus on the long term, short term
opportunities can arise
• 2. Business as unusual - Social distancing, supply chain
disruption, de-globalization: the “new normal”
• 3. Positioning for climate change - ESG vs COVID-19
• The “lucky country”: geographical, fiscal, China
Learn more about Invest Wisdom for the Digital Age
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.
Our point of view..
Public markets
Private markets
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.
…delivered directly to you in “the Digital Age”
1. Newsletters and websites 2. Webinars
• Monthly and special newsletters • Access local and global investment staff for our
• Contact: tracey.hayward@mercer.com best thinking
• https://www.mercer.com.au/our-
thinking/managing-novel-coronavirus.html
3. MercerInsight 4. Strategic research community
• Data analytics, manager and strategic research • Strategic research content posted directly
• https://www.mercerinsight.com/SRD/SearchR from the investment industry
esults.aspx • https://src.mercer.com/login
• Contact: john.humphries@mercer.com
Copyright © 2020 Mercer (Australia) Inc. All rights reserved. 9
“The Big Picture”: capital market assumptions
• Investing: capture a premium by
1. Probability
bearing various forms of risk
of meeting
• Therefore make assumptions objectives
about how the world is expected
to behave
6. Illiquidity 2. Volatility
• Models used to test financial
objectives (e.g. spending needs or
meeting liabilities)
RISKS
• To make informed investment
decisions, one needs a model of
the world 5. Concentration 3. Frequency
in factor of negative return
risks
4. Severity
of negative
returns
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.Approaches for tackling COVID-19 Stochastic model
A. Stochastic (“Capital Market Simulator”)
1. Regime switching
2. Fat tails (non-normal)
3. Lower for longer
4. Allow for negative interest rates
COVID-19: impact on fixed income, equity, currency, hedging
Global scenario set
B. Deterministic – top down/thematic
1. Global scenarios – best of our global thinking
2. Balances model risk
3. COVID-19 no longer separate scenario
4. Allow for U (“base case”), V, W, L shaped outcomes
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.“The Big Picture”: long term expectations for the coming decade
Rolling vs target 10 year returns for a sample 60/40 balanced fund*
COVID-19
* A sample 60/40 portfolio consisting of 30% Australian Shares, 15% Overseas shares UH, 15% Overseas
shares H, 20% Australian Fixed Interest, 20% Overseas Fixed Interest before tax and fees
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.COVID-19 & responsible investment
Systems thinking
Systems thinking: despite economic and advancements, the virus is a humbling reminder that the world
remains at the mercy of the Earth’s systems. COVID-19 is not a standalone risk, but is linked to other system
risks, from biodiversity to climate change action.
Source: WEF, Global Risks Report 2020; Monika Freyman Mercer RI Canada “ESG and Covid-19: Spotlight on Systems”
Copyright © 2020 Mercer (Australia) Inc. All rights reserved. 13Performance
RI strategies have generally demonstrated downside protection… E.g. of MSCI ACWI ESG Leaders
Data from 31-Jan-2020 to 27-Mar-2020; performance attribution calculated
using the custom GEM+ESG risk model
https://www.responsible-investor.com/articles/mercer-covid-19-elevates-the-value-of-responsible-investing
Copyright © 2020 Mercer (Australia) Inc. All rights reserved.Rise of the “S” in ESG
• Labour rights will be much higher up the
agenda post COVID-19, for companies
and their supply chains.
• Global job losses could be c.5 to 25
million jobs (best and worst case
scenarios, ILO data).
• How companies respond to the
pandemic will be important, will they
adopt a long-term perspective or instil
short-term solutions?
Source: WEF “Coronavirus makes inequality a public health issue”; UNDP “COVID-19: Looming crisis in developing countries threatens to devastate economies
and ramp up inequality”; ILO “Almost 25 million jobs could be lost worldwide as a result of COVID-19, says ILO”; US Department of Labour; BT press release
Copyright © 2020 Mercer (Australia) Inc. All rights reserved. 15Important information MERCER is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. References to Mercer shall be construed to include Mercer LLC and/or its associated companies. This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s prior written permission. The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. Mercer’s ratings do not constitute individualised investment advice. Information contained herein has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party. This does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products or constitute a solicitation on behalf of any of the investment managers, their affiliates, products or strategies that Mercer may evaluate or recommend. For the most recent approved ratings of an investment strategy, and a fuller explanation of their meanings, contact your Mercer representative. Conflicts of interest: For Mercer Investments conflict of interest disclosures, contact your Mercer representative or see www.mercer.com/conflictsofinterest. Mercer universes: Mercer’s universes are intended to provide collective samples of strategies that best allow for robust peer group comparisons over a chosen timeframe. Mercer does not assert that the peer groups are wholly representative of and applicable to all strategies available to investors. Risk warnings: The value of your investments can go down as well as up, and you may not get back the amount you have invested. Investments denominated in a foreign currency will fluctuate with the value of the currency. Certain investments carry additional risks that should be considered before choosing an investment manager or making an investment decision. This document is not for distribution to retail investors. This document has been prepared by Mercer Investments (Australia) Limited (MIAL) ABN 66 008 612 397, Australian Financial Services Licence #244385. Copyright 2020 Mercer LLC. All rights reserved. Visit mercer.com.au for more information
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