Long-term investing under threat
By Lynette Khoo
LONG-TERM investing is likely to decline in the coming years as markets become more volatile and traditionally long-term investors seek liquidity, said GIC deputy chairman and executive director Tony Tan. On the other hand, demand for long-term funds will increase dramatically given the rise of emerging economies and their infrastructure and investment needs.
Speaking on The Future of Investing panel at Davos, Dr Tan urged policymakers to consider the broader impact of their regulatory solutions and avoid blanket regulations that would deter long-term investors. This includes mark-to-market accounting rules, and capital controls to temper hot money inflows.
Dr Tan, who is also Singapore Press Holdings chairman, noted that though the global economy has recovered from the financial crisis, other risks remain high. These economic, political and market risks include the unresolved eurozone debt crisis, as well as growing imbalances such as potential asset price bubbles in Asia and sovereign debt risks in key major developed economies like the US.
The use of mark-to-market rules and the compensation model in the financial sector have also caused financial companies to become more short-term oriented, while investors have become increasingly concerned with short-term price fluctuations, Dr Tan said.
The difficulties of cashing out of real estate and private equity commitments in 2008 and 2009 have also led investors to rebalance their portfolios towards more liquid assets, he added.
Despite the apprehension over illiquid assets, however, the rise of emerging economies and their infrastructure and investment needs will create significant new demand for long-term capital, he noted.
A study by McKinsey showed that if consensus forecasts for global growth are realised, global investment will amount to US$24 trillion in 2030, from the current US$11 trillion. The Asian Development Bank also projected that developing Asia would require US$8 trillion for infrastructure projects through 2020.
Such large infrastructure needs could widen the gap between capital supply and demand, raising long-term interest rates and reversing the low interest rate environment that the world has enjoyed for the last few decades, Dr Tan reckoned.
'Under these circumstances, I would like to encourage policymakers to consider the broader impact of their regulatory solutions and avoid blanket regulations that would deter long-term investors. For instance, excessively rigid mark-to-market accounting rules and risk capital requirements may unintentionally constrain long-term investors by preventing them from riding out short-term price fluctuations.'
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He also highlighted the importance of keeping global capital markets open. Even as Asian economies are concerned about volatile hot money inflows and the risk of overheating and asset bubbles, capital controls should not inadvertently discourage long-term capital investments in illiquid long-term assets in recipient countries as such long-term capital is crucial for stable and sustained economic growth, he said. 'If governments closed their capital markets to long-term investors, recipient countries will face higher capital costs while investors will see their opportunity set shrink.'
This article was first published in The Business Times.
