As yields seem set to stay low for even longer and we face a “new normal” post COVID-19, investors may have to take a more innovative route than traditional assets can offer to generate the returns they need. Fortunately, there are plenty of opportunities that could provide them, and although initially unfamiliar, we believe there is real potential to be unearthed.
We recommend investors first consider the impact of rescue packages and recovery policies that have been issued in response to the pandemic. The cash injections have super-fuelled some market valuations, leading to some asset classes, some sectors and some stocks looking expensive for what they offer in return.
Emerging markets that coped relatively well with the crisis have generally been able to keep their economies and valuations in check. Of these, China is one of the leading lights, clocking up positive growth in 2020 as its superpower peers fared badly.
Away from public markets, private investments may also provide what a portfolio needs. Long-term investors with a time horizon that lets them lock up their capital could be rewarded with an illiquidity premium. When working in these markets, however, it is important to have an experienced guide. Our research suggests manager skill is key to generating long-term sustainable returns in private markets.
The same policies and packages that are presenting a skew in some financial and capital markets are also posing a potential risk of inflation. While useful for offsetting massive public borrowing, inflation can tear through unhedged institutional portfolios. We suggest, therefore, looking into strategies with inflation linkages, such as real estate and infrastructure. Once again, manager selection is key, as these asset classes can be long-term commitments.
Finally, investors are increasingly focusing on broad stakeholder issues, considering potential impact as well as profit. The pandemic raised awareness about sustainability issues, pushing the methods for generating returns into the spotlight along with the numbers achieved.
The acute concern of climate change is at the top of many investors’ agendas as it not only poses a risk to a range of companies in their portfolios, but offers huge opportunities too. Principally, the energy transition may be the single largest factor, which we believe investors need to address in their holdings right away.
Innovation and informed decision-making are going to be essential for investors seeking to generate the returns that our new future could offer. Looking forward, we believe the variety and uncertainty of the known risks we face, plus the events of the past year, reinforce the need for investors to build resilience and some spare bandwidth to help make and implement investment decisions into their governance agility and frameworks.
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