Much like the public enjoying the sunny weather over the Easter weekend, UK defined benefit pension scheme trustees will look back fondly on April as funding levels rebounded, with the PPF 7800 Index ending the month at 99.6%, up from 97.4% at the end of March. Growth assets were helped by equity markets continuing to push higher, largely driven by a positive start to the Q1 earnings season and the continuation of muted geopolitics throughout the month. Rising gilt yields meant liabilities fell, although yields remain below their end February levels. So despite liabilities rising £50 billion over the first four months of the year, the strong start to the year from risk assets (with most schemes seeing 10+% returns) means UK pension scheme funding levels are 1.6% higher than where they ended 2018 with aggregate deficits down £25 billion.
There were opportunities over April to lock in funding gains, either through increased hedging at opportunistic moments or following pre-defined funding level triggers being hit. Schemes which were able to reduce equity risk in March/April and subsequently increased interest rate and inflation hedging will have fared well. Amid ongoing concerns around Brexit and simmering trade tensions between the US and China, our message to trustees is to build resilience into their strategies through liability hedging, and be targeted and flexible in their growth portfolios, allocating to asset classes and regions which will make a difference. Above all, flexibility will be key in order to lock-in funding level gains when they occur and effectively navigate increasingly volatile investment markets.
As the tit-for-tat between the US and China continues, we see risks and opportunities ahead. Global stock market volatility has increased in recent weeks as the US raised tariffs, and at the point of writing we are awaiting China’s response. These short-term sell-offs and recoveries could put some investors off accessing an ever-opening market: the increasing inclusion of China A-Shares in the MSCI EM index. While the Hong Kong listed H-Shares are dominated by technology stocks, A-Shares represent an opportunity for foreign investment into a more diversified mix of local Chinese companies. China’s credit market is also opening up to more foreign ownership.
Despite being the world’s second largest economy, China has historically been under-owned, under-analysed and inefficient. A-Shares are expected to represent over 3% of the index by the end of 2019, and over time we see the potential for over $1 trillion of capital flow into China. China’s credit market is also opening up to more foreign ownership. This gives pension schemes a real opportunity to benefit from first mover advantage, ahead of it becoming part of the mainstay for investors.
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