It made my own struggles in getting across the Irish sea to visit in-laws seem a very minor inconvenience.

The impacts of climate change are not of course confined to the UK. In an exceptional (and exceptionally well-illustrated) article, journalists at the Washington Post wrote in December about accelerating rises in sea-levels along the US’s south-eastern seaboard. 

The impact is particularly pronounced at Fort Pulaski, Georgia, where average sea levels are now nearly 18 inches higher than they were in the 1940s. Nearly two-thirds of that change has come since 1980.

While the problem is particularly acute at Fort Pulaski, NASA projections show that in the coming decades many cities along the whole eastern seaboard will experience up to 100 more days of high-tide flooding each year.

Hollywood becomes Bollywood

The scale and reach of the changes driven by climate change are profound and global. In a ‘visual essay’ another group of journalists has shown how specific cities will feel in the years ahead.

Hollywood in Los Angeles currently has a temperate climate characterised by dry and hot summers. They report, however, that in less than 50 years, Hollywood will feel more like Bollywood with an arid climate that is more akin to New Delhi’s. Closer to home, London will remain temperate but will feel more like Washington DC and Atlanta than it does today.

Climate’s impact on economics

In some respects, some of these impacts might seem quite positive. Since we’ve seen temperatures of -1°C and lower already in 2025, temperatures that are on average 2-3 degrees warmer sound quite appealing. The problem is that the effects of climate change are diverse: warmer temperatures also bring more and more intense precipitation and stronger winds among other things.  And in cities that are already hot, another two to three degrees of warming can move daily activity from uncomfortable to life-threatening.

These impacts are now clearly affecting economics. In Florida, home and flood insurance has become dramatically more expensive, in part due to the risk of more frequent or more intense storms, as a result of climate change. California’s insurance market was already much diminished before the Palisades, Hurst and Eaton fires broke out in early January 2025. The impact of the fires is expected to lead to even less insurance coverage, and without insurance coverage, banks won’t issue mortgages. Globally, losses of USD320 billion due to catastrophes including extreme weather in 2024 were 30 per cent higher than the previous year.

In India, the Asian Development Bank warned in October last year that climate change could hit the country’s GDP by as much as 25 per cent within the next 50 years. A third of India’s GDP is linked to nature-related sectors. Increased frequencies of drought events are already negatively impacting agricultural output. Companies are also citing heat stress as a cause of reduced earnings.

In Europe, the European Central Bank recently estimated that the heatwave of 2022 caused crop yields to decline in that year, causing food inflation of around +0.6 to +0.7 percentage points. This impact lasted well into 2023. It’s already been speculated that ‘a material proportion of the debate at monetary policy committees will be taken up with discussion of how the economic forecasting model is going to interact with expectations of the next flood or wildfire season’.

Adaptation in a changed climate

It should not come as a surprise therefore that many companies, communities and even countries are already adapting to the climate change that is now with us and to that which is inevitably yet to come. By some estimates India is already spending more than 5 per cent of its GDP on climate adaptation. 

We are seeing evidence of this increased spending in our portfolio as well. We introduced a Climate Adaptation thematic as a part of our investment strategy early in 2024. Holdings include the Dutch environmental engineering business Arcadis as well as Advanced Drainage Systems, a US-based manufacturer of storm water drainage systems.  In recent earnings calls both companies have pointed to demand for their products and services increasing as clients look at adapt to increases in extreme weather^.

Other companies are also seeing growing demand for products and services that help make communities more resilient in the face of a changed climate. This includes demand for efficient cooling systems from Trane Technologies, water treatment and management equipment from Xylem and even fire-fighting equipment from MSA Safety. Most of MSA’s fire-fighting equipment is used in fighting fires in buildings. The company does also supply kit for fighting fires in rural areas – including to fire fighters working to extinguish the Palisades and Eaton fires.

We’ve written before about the increased prevalence of extreme weather that has now become a feature of our lives. But bear in mind that the changes we are currently seeing are associated with global average temperature rises of less than 1.5°C.  We can anticipate that the frequency, duration and intensity of these events will be dramatically worse from temperature rises of 2°C or more.

Although they can cater to a wide range of services – pensions, tax, philanthropy, lifestyle services – family offices across the globe are focusing on one theme: investment management. Here, they face an increasingly complex environment: diverse asset classes, more information to manage, and the need for transparency and risk reduction, while aiming for better risk and performance management. Against this backdrop, it is key for them to reflect on how they must secure wealth for future generations. A multifaceted goal which can be met by using smart modular technology.

Family offices are shifting capital allocation in the face of inflation, geopolitical unrest, fluctuating policy rates and investor preferences, e.g. towards sustainable investment projects. Against this backdrop, the number of asset classes in which family offices invest is on the rise.

Investments are not only restricted to financial markets but can also include alternatives. Art, private equity and venture capital are gaining a bigger share of allocations. As for the latter two asset classes, family offices are becoming more prominent in deal-making alongside M&A, real estate transactions, and directly investing in businesses. And increasingly more, family office professionals are actively investing in crypto investments.

Family vehicles are also transitioning to a more active fund management approach as a function of portfolio diversification. This general shift in diversification, especially since family offices invest across several investment entities, means increased reporting, accounting and compliance complexity for teams that remain lean.

Lean but growing

Most family offices are lean, employing a team of ten or fewer people, just enough to fill  investment management needs. Additionally, only 26 per cent have succession plans. Many firms also lack governance frameworks, cybersecurity controls, and risk management processes outside of investments. However, as family offices mature beyond the first generation, their assets under management reaching USD1 billion, and they grow in employee size, they are more likely to put more robust protocols in place.

Looking ahead, families are feeling the winds of change ushered in by wider digitalisation and they are changing their approaches to technology.  In some offices, younger generations are coming to the helm and spurring innovation. They are seizing on the opportunity technology to be able to achieve their investment and operational goals, all of which are essential to supporting future generations.

The digital-first family office

Technology, while not the answer to each family office challenge, does play a key role in nearly all of them via its smart application. Tech makes wealth management processes more efficient and cost effective and simplifies complexity across the broad range of allocations family offices have.

For example, family offices are increasingly adopting cloud-based digital platforms to manage portfolios, run analytics, and handle regulatory reporting across the globe. These platforms offer firms a single system that can minimise errors and inefficiencies involving the key value that sits at the heart of systems: data.

Accurate, timely, and consistent data is indispensable to workflow optimisation of all investing-related functionalities for family offices. Such data can be easily accessed via Data-as-a-Service providers that carry data on millions of instruments, across all asset classes and scores of exchanges. Amidst the abundance of available data, only a customised dashboard service that is designed to provide easy access to curated global data and exchanges will unlock the full potential of information needed for sound decision making.

Customised and intuitive dashboard

The need for robust data tools and solutions that allow financial institutions to manage investment decisions, reduce costs and comply with changing market requirements are more critical than ever. By streaming exactly the data a family office professional needs, its intuitive dashboard provides a highly responsive solution that delivers actionable insights, up to the minute pricing and full company reference data, fully tailored to the user’s needs.

In terms of creating continuity between generations, technology also plays a role. AI-powered solutions are available which enable intergenerational conversations via video. Here, a current steward would record multiple videos about the management of the office, family history, investments, or anything else they deem relevant. When they pass, those taking over the helm could directly see their family member before them, asking questions as if they were still in the room. An AI system would choose the appropriate clippings in response to questions.

Such a digital-first approach gives families an edge in their investment management focus and beyond. A development particularly important as family offices begin bringing additional operations under the family office umbrella or merge with other family offices to further optimise resilience, governance and operations.

Supporting future generations

Family offices by nature are generational undertakings, their horizons being 50 to100 years. And since technology will increasingly become the core of their service provision, the question arises of how they can choose vendors that support sustainable investment over lifetimes. Especially since the abundance of software solutions available that can help family offices increase efficiency in managing their wealth can be overwhelming.

When considering outsourcing solutions, family offices should also play the long game. This practically translates to prioritizing vendors that constantly develop products to ensure they are up to date.Vendors should also have outstanding support services and maintain a security-first approach. The latter point is key considering the impact of the European Union’s Digital Operational Resilience Act (DORA) and rising cybersecurity threats.

Finally, addressing the challenges faced by family offices today requires leveraging modular, intuitive technology. These systems provide plug-and-play components that allow users to create workflows for processes, data management, trading, and funds with ease.

They enable the consolidation of diverse asset classes, automate reporting, integrate ESG data, and simplify regulatory compliance. Importantly, such technology can often operate alongside existing legacy systems, offering a seamless transition to more efficient and adaptable operations. Embracing these innovations presents a significant opportunity for family offices to evolve and thrive in a rapidly changing landscape

With Japanese wages now also growing in real terms can wage inflation also add to the impetus behind the Japanese economy. How long will this trend continue? How high will Japanese wages go – or could underlying demographic challenges shorten this recovery in wages and consumer confidence?

If wage growth does feed through into higher consumer spending sectors of the economy, which are best placed to benefit from that?

Japanese real wage likely to continue growing for next few years

The Government is now actively supporting wage growth to avoid inflation eating away at household budgets – which would reduce consumption. Government assistance to help real wages is set to continue rising – surpassing price increases – over the next few years.

2024’s minimum wage increase rate of approximately 5 per cent is far higher than the norm for that past three decades. Meanwhile, growth in the Japanese Consumer Price Index (CPI) was 2.7 per cent in the year to August 2024.

The Government has set a target to further raise the minimum wage to 1,500 yen per hour by the mid-2030s. If this target is achieved, we should expect annual wage increases exceeding 3 per cent.

Most analysts initially assumed that inflationary pressures would not spill over into domestic prices – judging that companies would be unable to raise prices for fear of losing consumers. However, Government measures subsidising consumer prices and supporting wage increases have enabled companies to pass on price increases while stimulating above-inflation wage growth.

Service prices in Japan – directly influenced by wage trends – will likely rise in the short term. Real terms durable goods consumption has already recovered to pre-pandemic levels, while services expenditure has yet to reach pre-pandemic levels.

Retail and service sectors poised to benefit most

The retail and service sectors are likely to significantly benefit if wages continue to grow. Data from the past 20 years shows a strong positive correlation between wage growth and consumer spending – suggesting rising wages will increase household expenditure.

The age groups experiencing the fastest wage growth are workers in their 20s to early 30s – and the smaller purchasing power of the 60+ bracket.

While consumers in their 20s tend to spend more on rent, eating out, culture and recreation, expenditure for those aged 60+ skews more towards groceries, healthcare, and car and tech repairs. Given that Japan’s minimum retirement age is 60, consumption trends among those in their 20s will have a greater impact on the Japanese economy.

We expect that equities in these consumer subsectors will benefit from that considerable jump in demand. Over the past three months, the TOPIX industry indices show the retail sector has outperformed with an average share price rise of +8.5 per cent. Service sector shares have risen by +6.3 per cent on average – significantly outperforming the overall TOPIX, which declined by 3.1 per cent.

Market expectations of wage growth and price inflation have been major drivers of rising Japanese share prices over the past year.

Labour shortages and a weak yen contributing to real wage growth

Japan’s major demographic challenges – chiefly an aging population and declining birthrate – will further contribute to sustained wage increases. Both factors will exacerbate labour shortages in the long term. Current labour shortages are also prompting short term investments in automation – enhancing labour productivity and further supporting wage growth.

Additionally, the yen’s weakness against the dollar has now likely peaked. Wage growth is now being supported by a stronger yen – helping ensure sustainable wage growth for Japanese workers.

However long-term economic anxiety among Japan’s youth could incentivise greater saving – hampering further growth in the economy

While wage growth now outpaces inflation, it’s still only a modest increase – just over three per cent. Japan is already burdened by an expensive welfare state and growing welfare contributions will bite into this extra disposable income.

Longer-term anxiety – particularly amongst younger people – may constrain further increases in consumer spending. Japan’s long term economic prospects remain uncertain, particularly with an ageing and declining population – and corresponding ballooning welfare costs. Many younger people see greater saving as the prudent option for the long term.

There’s a large economic incentive for the Government to keep supporting wage growth – boosting domestic consumption. We, therefore, expect this trend of real terms wage growth to continue over the medium term. However, to secure sustainable wage growth in the long term, the Government will have to consider the structural changes needed to address a declining population.

Japanese households and Government are enjoying the short-term benefits of increased economic activity. Both want to realise the benefits of the current economic uplift – wages will keep growing, at least until the 1,500 yen per hour target is hit.

Bold forecasts that miss the mark are often quickly forgotten or swept under the rug by misfiring prognosticators.

Two years ago, we heard forecasts of “a 30–40 per cent decline in the U.S. dollar.” But as everyone now knows, the drop in the dollar didn’t happen. Compared to other developed countries’ currencies, such as the Japanese yen, the dollar is up more than 30 per cent since 2022. Further, since 2011, the dollar is up almost 40 per cent compared to a broad basket of currencies!

So why were the dollar bears so wrong? Popular misconceptions about the dollar’s role in the global financial system mislead investors and policymakers alike. These misconceptions never seem to die. We detail our favorite mistakes so that, hopefully, you won’t repeat them.

The result of human action not design

For much of its early history, the United States had nothing like a universal currency The US followed a bimetallic standard (linked to gold and silver), and paper money was shunned. However, the Panic of 1907 prompted Congress to create the Federal Reserve (Fed).

The Fed later issued “Federal Reserve notes,” lent to banks when liquidity dried up, and enforced “par” settlements for checks across the Federal Reserve System.

Then came a series of crises and some luck. The US’s favourable geographic location during the First and Second World Wars (far removed from most battlefields) allowed it to become the “centre of the global financial system.”Owning about 40 per cent of global gold reserves allowed the US to be one of the only countries that did not suspend convertibility throughout the wars.

But wasn’t the dollar system designed by policymakers at Bretton Woods after the Second World War? In reality, delegates ruled out competing plans as infeasible. In short, the dollar was just the best and easiest option.

In addition, the dollar’s reign had already gone global. The Euro-dollar market was born in the 1920s and was revived in the 1950s because London banks started accepting dollar (and other currencies) deposits and making dollar loans to third parties.

Modern-day crises have only further cemented the dollar’s global reign. During the global financial crisis, the Fed lent USD10 trillion in raw swap amounts to its major foreign counterparties, and again during Covid-19—a sign of just how vital the dollar is to the global economy.

The dollar will soon be displaced by a rival

The dollar is the most dominant currency, and its status has waned little in recent decades. According to the international currency index constructed by the Fed, the dollar has remained a steady leader in forex reserves, transaction volume, foreign currency debt issuance, and international banking claims for as long as data is available.

As for second place? It’s not even close. The Euro scores 23 on the index, one-third of the US level, though greater than the sum of the next three currencies combined – Japanese yen (JPY), British pounds (GBP), and Chinese renminbi (RMB).

Further, in 2015 countries with currencies anchored to the dollar (not counting the United States) accounted for 50 per cent of world GDP. In contrast, euro-linked economies accounted for just 5 per cent (not counting the euro area).

The world is de-dollarising.

The latest dollar bear fad is “de-dollarisation.” The argument is that major economies will prefer to use other currencies to avoid the ire of US policymakers keen to “weaponise” the dollar using sanctions.

De-dollarisation is catchy and alliterative. But it’s also wrong.

First sanctions are common and have been used for a long time. As early as 1935, the US-led League of Nations (predecessor to the United Nations) sanctioned Italy for its invasion of Ethiopia, banning loans and military equipment. In modern times, for military purposes, the US has frozen assets tied to the governments of Libya (2011), Iran (2012), Venezuela (2019), and most recently, Russia (2022).

Second, the benefits of “dollarisation” far outweigh the perceived risk reduction from de-dollarisation. Using the dollar allows you to reach 80 per cent of the buyers and sellers in global trade activity and the deepest and most liquid financial markets in the world.

While instituting sanctions dissuades some countries from holding Treasuries as reserves, it’s unlikely the bulk of dollar reserve holders will dump the dollar. In fact, overseas governments with military ties to the US own nearly three-quarters of the total US debt held by foreign governments.

In short, the benefits of operating in dollars far outweigh the costs of de-dollarisation.

Debt overhang will sink the Dollar

Another common misconception is that the dollar is (always) on the brink of collapse due to excessive debt burden. Headlines often tout the “USD27 trillion in marketable debt outstanding.”

From a first approximation, we find this view tedious. For the last 30 years, one could have said the same thing every day of every month in every quarter of every year. So far, the predictive value is nil, for the cumulation of national debt has yet to lead to higher yields or a debt default.

The debt issue is overstated. The average cost (yield) of US debt is only 3.4 per cent as of July 2024, still much lower than most of the country’s recent history, thanks to the dollar’s status as the global reserve currency and decades of price stability since the 1990s. Unless the Fed funds rate stays above 5 per cent for a few more years, we’d argue that the current trajectory of the US debt burden remains manageable.

 Dollar doubters beware

Contrary to popular belief, there are no viable rivals to the dollar. De-dollarisation may occur to a limited extent and be led by bad actors in the global financial system. Still, users of the dollar system overwhelmingly benefit from trading, borrowing, and saving in dollars. Further, debt burdens do not yet threaten the dollar system’s stability, with debt service costs manageable and dollar debt buyers more eager than ever to hold greenbacks.

In share markets, those 16 years have also seen an expansion of the domination of the US market, to the extent that it now comprises almost 65 per cent of the total value of global share markets. Europe and Japan have seen their combined share fall from 39 per cent to 20 per cent, within which the UK is now just 4 per cent of global stock market value.

Within the developing world, China’s star has collapsed in recent years, replaced by the rise of India, which has recently overtaken the UK both in the size of its economy, and the size of its stock market.

Other than the obvious issue of that concentration of global stock markets in the United States, there has also been the concentration of returns in the US market in big technology.

While the technology sector is here to stay, is difficult to predict the full economic effects of AI and whether it will be the next industrial revolution, and a sea change in profitability for many companies and industries.

Concentration of market returns has been significant

Over the first six months of 2024, the US stock market produced 75 per cent of total global stock market return. Within that, NVIDIA, was responsible for 59 per cent of the US stock market return, and therefore 50 per cent of total global market return.

Narrow market leadership is not that uncommon, but the level of concentration this year in high quality (but not necessarily cheap) companies, clearly represents a conundrum for investors.

To ‘chase’ a very narrow segment of companies on the basis of short term performance, or to maintain a more balanced approach on the basis that such periods rarely last, and that investors are ignoring significant investment opportunity in the rest of the US market, and the rest of the world.

Chasing current trends instead of sticking to investment fundamentals can be risky. This was evident in July/August when a weak employment report and unchanged interest rates triggered a sharp correction in “hot” market sectors.

US interest rates, markets, and recession, or not?

Whether a US recession happens or not, the direction of travel is for some slowdown in the US, and therefore global, economy.

In itself that shouldn’t be feared, provided the slowdown is managed along with a reduction in interest rates, a crucial point for the stock market over the next year.

The Federal Reserve began easing rates in September, and we expect further cuts will take place later this year, the timing of which will likely be impacted by the US presidential election in November (as central banks are loathed to cut rates close to an election, as it is deemed to be too politically sensitive).

This is potentially very important for US, and therefore global, stock market returns over the remainder of the year.

Whither now?

Market returns are expected to broaden beyond US technology, with other sectors and markets (including infrastructure and fixed income) benefiting from falling interest rates and an improved outlook.

Emerging markets have had a difficult time in recent years, partly because of issues in the Chinese economy. Lower US interest rates should mean a lower US Dollar however, and this has historically been good for emerging market investors.

The rather beaten up and unloved UK market, which is trading on low levels, may also see a revival, (though with the caveat that we have to see what the new Chancellor will announce in the autumn budget at the end of October).

Though most market commentators believe a US recession will be avoided, the global impact of US economic shifts remains a concern, as US market movements are often echoed worldwide – reinforcing the adage, “if America sneezes, the world catches a cold.”

That has never been more relevant than now, given how much the US dominates global markets.

As a result, a new category of investment strategies focusing on “energy transition commodities” has emerged, offering exposure to metals like copper, aluminium, silver, and platinum, often coupled with a component of carbon allowances. Yet, investors must be mindful of the volatility and long-term nature of these investments. Attempts to profit from the anticipated “green supercycle” face obstacles from sluggish global economic growth, policy uncertainty and rapidly changing market conditions..

An old asset class with renewed potential?

Since the 2008 financial crisis, commodities have not regained their former popularity among institutional investors. The upcoming 2024 bfinance Global Asset Owner Survey will show that fewer than a quarter of pension funds, insurers, and other large asset owners have direct investments in commodities. This figure has barely shifted since the 2022 survey. It’s clear why: despite strong returns in recent years, with the Bloomberg Commodities Index (BCOM) up 27 per cent in 2021 and 16 per cent in 2022, the long-term performance from 2008 to 2022 was incredibly disappointing, with an annualised return of -2.6 per cent and high volatility at 17 per cent.

Nevertheless, there is a growing argument for incorporating commodities into portfolios as a hedge against inflation and a way to mitigate increased stock/bond correlation . The 2022 spike in commodity prices, during a period when both equities and bonds posted losses, underscored the potential of commodities to offer diversification benefits.

The long-term case for investing in energy transition-related commodities is particularly compelling. The global shift from fossil fuels to renewable energy will generate massive demand for raw materials needed for electrification, energy storage, and modernising infrastructure. However, supply constraints—driven by years of underinvestment, environmental regulations, and geopolitical factors—create a challenging environment. Prices are therefore predicted to increase.

Investors cannot be complacent with their exposures, however. For example, lithium prices dropped 80 per cent in 2023, despite its critical role in the batteries of electric vehicles. Mining companies ramped up supply as prices soared in 2021-22, before running into a demand slowdown, particularly in China. This highlights how short-term supply and demand mismatches can disrupt a long-term growth story.

Emerging strategies for energy transition commodities

An increasing number of commodity investment strategies are now directly targeting the energy transition theme. These strategies span various investment approaches, from hedge funds and commodity-focused equity strategies to diversified portfolios that include a broad range of commodity futures. However, there is also a smaller, but rapidly growing, group of strategies that place energy transition commodities at their core.

While many of these strategies are relatively new, they are often built on the foundations of established commodity expertise. There’s certainly a marketing element at play, with firms capitalising on the popularity of energy transition narratives. Nonetheless, these strategies are rooted in genuine investment beliefs, with many asset managers overweighting key transition commodities regardless of whether or not the strategy carries an energy transition label.

A recent bfinance analysis of commodity strategies with an energy transition focus identified four key trends compared to standard commodity allocations:

1. Less Exposure to Conventional Energy: These strategies significantly reduce their exposure to oil and gas compared to traditional indices like BCOM (30 per cent in oil and gas) or the S&P GSCI (58 per cent). While some strategies entirely exclude natural gas, others maintain exposure to it, given its status as a “bridge fuel” – cleaner than other fossil fuels and a reliable backup for the intermittency of renewavles. Ethanol and uranium also appear in some portfolios, but liquidity issues limit their prominence.

2. Increased Focus on Industrial Metals: Industrial metals such as copper and aluminium play a central role in these strategies, as they are crucial for energy storage, renewable energy production, and electrification. Commodity managers are betting on significant demand growth, supported by commitments to clean energy and underinvestment in mining.

3. Minimal Agricultural and Livestock Exposure: Most agricultural commodities are considered irrelevant to the energy transition theme, while livestock is seen as problematic due to its carbon-intensive nature. However, a few strategies include biofuel-related crops like corn and soybeans.

4. Inclusion of Carbon: Carbon allowances, particularly from the European market, are a key feature of energy transition strategies, even though they are absent from traditional commodity indices. UK and US carbon markets also play a role in some portfolios.

The role of copper

Copper is a standout example within energy transition commodity strategies, typically representing the largest single exposure, averaging12 per cent. Its importance in electric vehicles, renewable energy, and power infrastructure is clear. According to the IMF, copper production will meet just 60 per cent of expected demand between 2021 and 2050. An electric vehicle, for instance, requires over 80kg of copper, and renewable energy installations such as wind and solar farms also rely heavily on it.

Despite this, copper prices have remained relatively flat, with weak global economic growth—particularly in China—dampening demand. This price stagnation could discourage further investment in copper mining, exacerbating future supply shortages. Many commodity managers believe that copper prices will inevitably rise to correct this imbalance.

Conclusion

Commodities linked to the energy transition hold significant potential for long-term growth, but they are not without risks. Short-term factors, such as global economic fluctuations, political instability, and shifting demand patterns, can pose challenges for investors. Moreover, many raw materials come from emerging markets, which are particularly vulnerable to political risk, and China remains a major driver of commodity demand.

Active management is essential in navigating these complex markets. By adjusting portfolios in response to evolving supply and demand dynamics, asset managers can tap into the opportunities offered by the green supercycle while mitigating potential downside risks.

With fragmented banking markets unable to meet the growing demand for credit—particularly in middle-market sectors—private lenders are stepping in to fill the financing gap. This rapidly expanding market offers investors attractive risk-adjusted returns and diversification opportunities, positioning APAC private credit as a key driver of regional economic development.

Economic growth

APAC is projected to account for up to 70 per cent of global GDP growth, creating substantial demand for credit financing. Traditional banking institutions in the region face regulatory and structural constraints, such as Basel III requirements, limiting their ability to meet this rising demand. This is especially true for micro, small, and medium-sized enterprises (MSMEs), which make up 97 per cent of all businesses in Asia, accounting for 56 per cent of the workforce and 28 per cent of economic output. This unmet need for financing presents a significant opportunity for private credit providers to step in and bridge the funding gap.

Structural inefficiencies in traditional banking

The APAC banking sector, while a dominant force in credit supply, faces significant inefficiencies, particularly with non-performing exposures and inflexible lending practices. Many banks favour lending to government-backed industrial sectors, leaving other segments, notably MSMEs, underserved. Recent global banking concerns and tightening credit conditions have further amplified these challenges, presenting a clear opportunity for private credit to step in with flexible and accessible capital solutions. Additionally, the region’s leveraged loan and high-yield bond markets are underdeveloped and fragmented, as local lenders seldom venture beyond their borders—highlighting the untapped potential for private credit to fill this gap.

Infrastructure and sustainability

Private credit in APAC is increasingly pivotal in both financing critical infrastructure projects and promoting sustainable development. Funds like SC Lowy’s Strategic Investments IV (Asia) are providing essential capital to businesses that are otherwise restricted from traditional bank lending. This funding enables the development of crucial sectors such as real estate, toll roads, and transportation networks, particularly in countries like India. These infrastructure projects are vital for supporting long-term economic growth and enhancing regional connectivity.

At the same time, private credit is advancing sustainable development by offering financing to small and medium-sized enterprises (SMEs) and large infrastructure projects in underserved areas. Many APAC countries face limited access to capital, and private credit steps in to fill this gap, promoting entrepreneurship, job creation, and inclusive economic growth. By fostering both infrastructure development and financial inclusion, private credit investments contribute significantly to the region’s long-term sustainable growth, especially in markets that have historically been underserved.

Dynamic market opportunities with returns

APAC presents a broad spectrum of investment opportunities, from highly developed markets like Australia and South Korea to rapidly growing emerging economies in Southeast Asia. This diversity allows private credit investors to implement tailored strategies, such as direct lending and collateral-backed lending, that suit the unique characteristics of each market. Investors who navigate the region’s complex legal and regulatory environments gain a competitive advantage, positioning them to achieve attractive risk-adjusted returns. APAC private credit investments offer a premium over comparable opportunities in the US and Europe, with direct lending deals typically yielding a 300-500 basis-point premium. More complex capital solutions can offer even higher returns. The relatively low level of competition among lenders enables private credit providers to negotiate favourable terms, such as robust covenant packages and asset-backed loans, enhancing both risk protection and return potential.

Diversification

For global investors, APAC private credit provides substantial diversification benefits, offering exposure to both developed and emerging markets. Sectors like real estate, industrials, healthcare and infrastructure are ripe for investment, providing opportunities to diversify beyond the traditional focus areas of public market portfolios. Additionally, investors with local expertise and strategic flexibility can tap into niche opportunities, navigating diverse legal frameworks and capitalising on regional market nuances.

Risks

Despite the potential for strong returns, investing in APAC private credit is not without challenges. Political and regulatory risks are significant, as sudden policy changes—such as those seen in China—can affect the stability of private markets. Local regulatory environments may also be less mature compared to developed markets, adding layers of complexity. Mitigating these risks requires deep local knowledge and partnerships with firms that understand the intricacies of each market.

Conclusion

The APAC private credit market is poised for continued growth as economic expansion, structural banking inefficiencies, and rising demand for capital create new opportunities. With attractive risk-adjusted returns and diversification benefits, private credit is well-positioned to meet the financing needs of businesses across the region. For investors equipped with local expertise and a strategic approach, APAC private credit presents a compelling opportunity to achieve superior returns while supporting sustainable economic development across a rapidly evolving region.

However, as the election nears, investors should begin to assess the potential impacts on specific assets. While fundamentals generally drive market direction, the results of the election—especially considering control of Congress—could lead to nuanced shifts in markets.

Election Impact on Asset Classes: A Trump presidency could benefit US equities but hurt government bonds, while a Harris victory might favour emerging market assets and affect the US dollar negatively.

Congressional Control Matters: The balance of power in Congress is crucial, with different market effects depending on whether either candidate secures a divided or unified government. For example, a Republican Congress under Trump would push more aggressive fiscal and trade policies, impacting inflation and bond yields.

Moderate Market Responses Expected: Markets are likely to see more muted responses this election cycle compared to 2016, partly due to limited fiscal room for drastic policy changes and investor caution. However, asset-specific trades, such as gold and equities tied to US domestic policies, will still be influenced by election outcomes.

Fund managers employ FX hedging strategies for a variety of reasons. For example, they need to mitigate the volatility and risk associated with currency fluctuations for their portfolios and investors, and even related to their own fees.

FX hedging costs are on the rise again, continuing the pattern seen in previous years and reaching highs not seen since the beginning of the year.

Recent research shows European fund managers are feeling the pinch, with 84 per cent stating that their hedging costs had increased over the past year. Rising FX hedging costs can affect them in numerous areas, including portfolio returns, investor commitments and fee income.

But why is the price of FX hedging rising? And how can fund managers navigate rising costs in an area that is so vital to their businesses? 

Behind the rise in hedging costs

Global FX hedging costs have increased in step with geopolitical tension and economic troubles, as many large economies fight to keep inflation at bay. Such issues create an unpredictable environment for investors and businesses, making them unsure about future activity and leading to more sporadic fluctuations in the currency markets. What’s more, as global uncertainty and inflation remain high, so does fixed-income volatility, further contributing to the increased cost of currency hedging.

In addition, market volatility can bring reduced liquidity as liquidity providers widen their spreads to shield themselves from unpredictable currency movements. In addition, some providers may withdraw from the market during times of geopolitical and economic uncertainty. This reduces the number of liquidity providers active in the market, further increasing the cost of hedging currency risk.

An essential tool for fund managers

Global FX volatility makes currency hedging even more crucial for fund managers. As the risk of unpredictable currency movements increases, so too does the need to protect portfolios from them. In this sense, hedging more during times of higher volatility enables fund managers to add a layer of certainty, stabilise returns and focus more on the performance of their investments, rather than on currency fluctuations.

One of the drawbacks of hedging is margin (I.E. collateral), which can act as a hidden hedging cost and put fund managers off hedging their FX risk.

Any capital posted as collateral is effectively sitting dormant in a margin account and not available as working capital. The FX risk, mitigated with forward contracts, has been replaced with a potential liquidity risk. This is an implicit cost that fund managers must also consider.

One way around this issue is to trade via an uncollateralised FX facility so that a fund manager can hedge using forwards and not worry about posting margin. Some solutions crucially offer this service without jeopardising best execution, ensuring total cost transparency.

Keeping costs at bay

The first step that firms can take towards saving on their FX hedging costs is Transaction Cost Analysis (TCA). To effectively manage and hedge FX exposures, it’s important to first measure the cost and quality of your execution and to get a view of all costs.

TCA was specifically created to highlight hidden costs and enables firms to understand how much they are being charged for the execution of their FX transactions. It goes hand in hand with best execution, serving as an ongoing audit of FX practices. Ongoing, quarterly TCA from an independent TCA provider can be embedded as a new operational practice to ensure consistent FX execution performance.

Fund managers should also look to compare the market. By securing multiple quotes from a variety of FX liquidity providers, fund managers can compare pricing on hedging instruments, such as FX forwards, enabling them to find the most competitive rates. Technology platforms can also help here, centralising FX data from a range of counterparties and service providers to make best execution easier to find.

The significance of proactive FX management cannot be overstated. Fund managers must prioritise regular monitoring and strategic adjustments to their FX strategies to safeguard their returns and operational stability.

As we navigate through dynamic market conditions and pivotal political events, a diligent and forward-thinking approach to FX hedging will be crucial for avoiding pain, protecting returns and achieving sustainable success.

In the media, recent headlines have seen corporate giants backpedal on their ESG initiatives. Meanwhile, in the background, the introduction of ESG reporting regulations has heaped pressure upon the shoulders of asset managers and corporations, pushing them to engage with ESG and sustainability.

The result? Half-hearted investment in ESG and sustainability, with initiatives that look good on paper but see very little return on investment.

The truth is, ESG and sustainability can drive tangible value for both asset managers and their clients. But to leverage this opportunity for growth, asset managers need to rethink their approach to ESG and sustainability from the ground up – starting with who they place in charge of managing their ESG investment strategy.

Where asset managers so often go wrong is a dependence on ESG and sustainability specialists to dictate the direction of their ESG strategy.

To maximize the potential value of ESG and sustainability, investment strategies must be thoughtfully intertwined with a company’s broader corporate strategy. As asset managers look to tie their ESG and sustainability strategy to corporate goals and values, they should begin to turn to cross-function generalists with a broad expanse of experience in the business world.

At first glance, this might appear counterintuitive. Why wouldn’t you want a specialist with an academic background in diversity or sustainability to spearhead your ESG strategy?

The issue is that an ESG specialist’s strengths are also the very thing holding ESG and sustainability strategies back from succeeding. Their narrow, needle-sharp focus on the core tenets of ESG often results in missed opportunities for growth and value creation when drawing up their vision for ESG and sustainability.

ESG objectives cannot be achieved in isolation from a company’s corporate strategy – they must be informed by it. There is no “one size fits all” approach when it comes to ESG and sustainability. Investment strategies should be aligned with the specifics and particularities of the company and its industry, from its area of operation to its supply chain partners.

Untethered to businesses’ interests, ESG and sustainability strategies easily lose direction. They become vague and wide-sweeping, making them difficult to measure and achieve. As such, ESG and sustainability appear to underdeliver.

This is where the generalists come in.

‘Generalist’, in itself, is a vague term – but by generalist, I mean someone who has cut their teeth in the business and asset management world and can confidently use their knowledge and experience to shape the firm’s ESG and sustainability approach.

It’s this corporate know-how that sets them apart from ESG and sustainability specialists. Driven by an understanding of both the complexities of ESG and the industry landscape, generalists will be able to align ESG and sustainability investment strategies with the wider interests of the businesses they manage.

Where the specialist’s outlook is narrow and defined by their subject-specific knowledge of ESG, the generalist will have a firm understanding of where and how to implement certain ESG and sustainability targets. They’ll be on top of industry trends, and aware of future opportunities for ESG and sustainability investment, factoring this into the firm’s overall strategy.

Spurred on by an understanding of how companies work – and, crucially, what companies need – generalists will be able to take an agile approach to ESG and sustainability. They’ll be able to spot opportunities for investment and recognize where efforts need to be concentrated to best drive value for a company.

ESG and sustainability will become fully integrated within the firm’s investment strategy – a natural part of the decision-making process rather than a checkbox that asset managers feel they need to tick.

Too many asset managers have fallen short of completely integrating their ESG and sustainability approach with their overall investment strategy. It’s created a gaping chasm between ESG and profitability, compounded by focusing on ESG targets that are ultimately of little relevance to businesses and their stakeholders.

These shortcomings have combined to paint ESG as something it’s not, resulting in the misguided fear that ESG and sustainability cannot and will not be of tangible value to a business.

For as long as governments continue to introduce ESG and sustainability reporting regulations, the pressure will remain on asset managers to engage with ESG. Firms need to grab the opportunities ESG presents with both hands – and generalists are the key to unlocking its potential value.