Mercer has flagged credit, private debt, hedge funds and resources as key investment opportunities as the world adjusts to game-changing circumstances.
Nick White, Mercer global strategic research director, told a Pacific region clients in a webinar last week that investors face challenges across the short-, medium- and long-term requiring an agile approach to asset allocation.
White said Mercer had identified three overarching themes set to play out over different time-scales, namely: interest rate- and inflation-driven regime change in equity and bond markets; ‘super-cycle’ processes including push-pull inflationary forces; and, mega-trends headlined by ‘energy modernisation’ and a refocus on natural world risks.
He said the global regime change heralded by the 2020 COVID crisis, the Ukraine war and rising inflation has created market “dispersion and dislocation” that open up alpha-generating opportunities.
In particular, White said alpha potential was emerging in credit markets and hedge funds – especially those operating in the secondaries space.
The current regime of higher interest rates and bond yields also offers investors a chance to readjust strategic asset allocations to lock in portfolio efficiencies, increasing the odds of better long-term risk-adjusted returns.
But even as price pressures appears to be easing across the globe, White said ‘super cycle’ effects suggest choppier times amid inflationary cross-currents.
“While cyclical inflation is coming down there are strong structural forces in the background,” he said.
Disinflation in the services sector, likely led by artificial intelligence (AI) efficiency gains in the years ahead, could be outweighed by a more fractured global economic system and ‘greenflation’ factors set to push resource costs higher.
Resources would benefit, too, from the longer-term ‘mega-trends’ identified by Mercer as ‘energy modernisation’ and the ‘natural re(order)’.
For instance, demand for the minerals needed to electrify the world will soar – despite a short-term slump in prices – while companies also face pressure (from governments and investors) to limit damage and restore natural environments.
White said investments in resources and real assets in sectors such as agriculture and forestry could provide a portfolio hedge against the longer-term inflationary trends.
Citing a recent World Economic Forum study, he said the next 30 years could “reverse” the experience of the 1990-2020 period where resource prices fell and the cost of services increased.
“AI could make areas of the services sector more efficient as resources become more expensive,” White said.