Joseph Pacini, Head of Alternative Investment Strategy Group for BlackRock Asia Pacific is cautiously optimistic that 2013 will be a year of better opportunities than recent events might have suggested.
BlackRock is a $3.7 tln business globally, with $115bn globally in alternatives, $30bn in single strategy funds and just under $20bn for hedge fund advisory. In Asia, there is some $22bn in alternatives, over 50% of which is in single strategy hedge funds or hedge fund advisory.
Pacini believes that for Asian investors looking globally there are three key themes of opportunity for investors. The first is the dislocations in the markets caused by deleveraging of a wide range of assets, such as real estate debt in Europe, or in fixed income. "The theme here is taking advantage of the distress of the sellers not the assets" Pacini says, in an interview with Asia Pacific Intelligence.
"The second theme is how can we benefit from the lack of capital and the lack of lending? Can hedge funds become lenders of choice to growth opportunities in Europe, the US and Asia?" And the third is how can investors monetise volatility globally? "If you look globally at economies there are clear winners and losers - how can you benefit from the differentiation? This is where a lot of our Asian clients are looking at and we try to be a conduit for that business."
Pacini closed 2012 with a number of conversations with the most sophisticated investors in the Asian region. "There is some cautious optimism whether we look at the US, Europe or Asia" he says. "There is a belief that the US will resolve its fiscal cliff issues, Europe will achieve stability and there is a belief that there were will be positive implementations in Asia for continued growth. That is playing out into a desire to increase risk assets. Institutional investors are actively planning to increase their allocations to alternatives over 2013."
The Chinese character for 'crisis' is made up of two characters, one for risk, and one for opportunity, Pacini explains. "In a crisis there is a natural desire to look for opportunity in the risk. Asian institutional investors don't need everything to be completely fixed, they just need to see that there is a plan to fix it."
From a global investor's point of view, Pacini sees an interest in investing back into Asia to be part of the growth story. China may have seen a cut in its growth pattern but as Pacini says, even at just 7.5 to 8%, this is good growth. "Investors in private equity in China have seen it out perform the public equity markets. There are ways you can benefit from these growing markets" he says.
He believes that in China there is a real desire to allow more markets or instruments, including shorting and free flow of investment allocations. "As that happens there will be a desire to invest. They want the growth but not the volatility so a market neutral strategy is something that is pretty attractive and will continue to be in the future."
Winners in China will be global companies that have some sort of advantage in their production who do not currently have an angle in China. "The Chinese consumer market is pretty interesting for us" Pacini says. "A company that makes a really good heel for a woman's shoe, or an automotive manufacturer - if they gain a partnership in China which has a more discerning and growing consumer market, they will benefit."
Leveraging off the desires of the 300m Chinese middle classes, who are set to increase to one billion in 10 years, and whose tastes are changing is a winning trade. Looking back into the pan- Asian investment markets, Pacini says that BlackRock tries to diversify its approach. "We actively invest throughout the region, but we have to be realistic that you have to be able to short and we prefer a pan Asia view that allows us enough liquidity. It's a pan Asia view but it absolutely means that we may overweight opportunistically - there are good companies throughout the region but we have to be sensitive to liquidity in these markets. At BlackRock, our view is that risk comes first. You have to balance the risk and rewards."
So to sum up, Pacini believes that 2013 has the makings of a good year. "It could be a bumpy road along the way but we do believe that next year has the makings of a good year. We start the year knowing there will be volatility, that we are not in a framework where everything is rosy and perfect. There will be a lot of hard decisions that have to happen in Europe and the US. We will have positive and negative headline news but the underpinnings are looking better; consumer confidence is looking better; we are looking at a situation while there will continue to be volatility and uncertainty but the markets are poised for a stronger place in the future. Investors are cautiously optimistic and they will want to invest in a hedged way."
Pacini specifically sees opportunities in the deleveraging of assets that will roll out over 2013. The late 1980s American Savings & Loan crisis saw $250bn in assets sold off; the late 1990s saw $350bn sold off because of the Asia crisis. Our most recent financial crisis has seen $2 tln in assets sold off and another $3-5tln still to go. "The reason why it hasn't all been deleveraged already is because of uncertainty and regulatory change. Once there has been some clarity and the rules are set there will be more opportunities to buy and we are trying to position ourselves to find these opportunities" Pacini says.
"Some of these will be bad assets but if you can identify the good ones, 2013 might be one of the best times ever to buy." Assets such as mortgage backed securities, quasi private debt, corporate debt, equities, both public and private are on the list. "Some of the trophy assets are the first to be sold, like property in London, and going down the risk spectrum and it will get a bit more messy. But if you can properly assess them there will be an opportunity to achieve terrific returns."
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This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.