Inescapable investment truths for the decade ahead

Schroders
Simon Stevenson
Simon Stevenson
Schroders Deputy Head of Multi-Asset
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It seems clear that the world investors have got used to over the last few years is very different to the one we need to get accustomed to in the years to come. We have identified a number of economic forces and disruptive forces we think will shape the investment landscape in the decade ahead. They represent our "inescapable truths".

Economic forces

We believe a confluence of factors will set the scene for a slowing global economy in the next decade:

  • Slower growth in the global labour force
  • Poor productivity growth
  • Ageing populations
  • A growing role for China
  • Low inflation
  • Low interest rates

This backdrop is similar to what we’ve seen since the global financial crisis, where equity and bond markets have performed well despite low growth and inflation. However, the big difference for the years to come is that there will no longer be the tailwind of ultra-loose monetary policy, where interest rates have been kept well below inflation.

As interest rates normalise and quantitative easing (QE) unwinds, we think there will be a greater focus on the reliability of corporate earnings as market volatility increases. Just because GDP growth will be lower, it does not necessarily mean that companies’ profit growth will be lower.

Returns from market indices will also be lower, we believe. Investing passively (tracking a market index) is not likely to reap the returns investors have grown to expect.

The implication is simple: there will be greater need for active fund managers who can generate alpha – i.e. who can beat the market – in the period to come.

Disruptive forces

We think disruption will come from a number of angles in the years to come. 

Market disruption

Changing patterns of finance. Banks are likely to play a reduced role in financing economic activity and other forms of funding will grow in importance. We expect the corporate bond market to expand along with private equity and alternatives such as peer-to-peer lending and crowdfunding.

The end of QE. Other central banks are likely to follow the US’ lead in gradually reducing the assets on their balance sheets. These were assets bought via QE - a measure to ward off the fallout following the financial crisis. This unwinding will increase the supply of government bonds and corporate bonds to the private sector. It should be welcomed given the present shortage of these supposedly “safe” assets and with more retiring savers seeking investments that may offer greater financial security.

Technological disruption

Changing business models. Technology creates unique challenges for investors through its tendency to disrupt existing businesses and create winners and losers. Clearly picking those who are on the right side of technological progress will continue to be key for investment performance.

Displacement of jobs. Technology can bring greater efficiency in production, but can also increase displacement in the labour market as traditional jobs become obsolete. The increased use of robotics and AI (artificial intelligence) will affect a wider range of professions. This may worsen the problems of inequality and potentially bring even greater political disruption.

Environmental disruption

Rapid action needed. Our views of the future are complicated by growing tensions between the real economy and the natural environment - and climate change, in particular. The challenge has been centuries in the making, but remedial action will have to be far faster to avoid its worst impacts.

Unchecked environmental damage will have severe economic and social consequences. While inaction implies significant long-term risks, steps to avoid the worst effects of climate change will also prove necessarily disruptive.

Political disruption

Government finances will come under pressure. The economic outlook will undermine government finances, while ageing populations will increase pension spending and demand for healthcare. The ability of governments to meet voter expectations will become increasingly challenged and may feed further populist unrest.

Pressure on individuals will grow. Government challenges will mean people will have to take greater individual responsibility for funding their retirement and healthcare.

The rise of populism will increase political complexity. Policies to temper the impact of globalisation through restrictions on trade, immigration and capital flows are increasingly likely to emerge.

In summary, after almost a decade of strong returns many investors have become complacent about the outlook. This assessment suggests that in a more challenging future environment factors such as asset allocation, access to multiple sources of return, active stock selection and risk management will be critical in meeting the goals of investors over the next decade.

As we enter the next phase of the post-global financial crisis era, these inescapable truths can help guide investors through a time of unprecedented disruption.


This is a summary of an original article written by Charles Prideaux, Global Head of Product and Solutions and Keith Wade, Chief Economist & Strategist at Schroders.


Disclaimer:
Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article.  They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice.
In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us.
Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person.
This document does not contain, and should not be relied on as containing any investment, accounting, legal or tax advice. You should note that past performance is not a reliable indicator of future performance.

 

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*Source: All data as at 30 June 2018