Investors will have to rethink asset class assumptions while remaining nimble as long-term mega-trends etch indelible changes on markets and society, Salt Funds argues in a new paper.
The Salt ‘Structural themes 2023’ report updates the inaugural edition published two years ago, laying out the investment implications of 10 overarching global trends.
Greg Fleming, Salt head of global diversified funds, said the paper highlights why investors relying on recent past statistical patterns to repeat were likely to be disappointed.
“The mega-trends we first discussed two years ago have been drowned out by the recent short-term noise – and there’s been a lot of noise,” Fleming said.
He said the paper is a reminder for investors that “tectonic” social, fiscal and monetary forces are driving changes that could upend the behaviour of asset classes.
“For example, US sovereign debt might not necessarily be the risk-free asset that investors previously took for granted,” Fleming said.
The thematic undercurrents would likely usher in a period of lower growth, stronger inflation, higher interest rates, shorter economic cycles and rising geopolitical tension, the Salt report says, with important implications for investment management.
“In our view, it is not enough to argue that ‘in the longer term, market returns will revert to their historical norms’. Rather, we think some fundamental shifts have occurred, not least in the volatility level an investor needs to be comfortable with to reasonably expect a given returns target,” the paper says.
Against the more uncertain backdrop, Salt says portfolio planning would have to:
- include investments able to perform in inflationary times;
- embed a “systemic process” to invest in line with the overarching themes;
- be ready to use volatility as an “opportunity to shift investments into harder-to-find, undervalued assets”; and,
- take into account the effect of demographics on investment opportunities and its implications for investors depending on their different timeframes.
The Salt 2023 structural themes and investment implications “are much the same” as in the original version, the report says, albeit with a few plot developments.
“First and foremost, the world is a more challenging place in 2023. Heightened political tensions and rising political fragmentation have clear and obvious implication for growth, inflation, and markets,” the paper says.
“… But it’s not all bad news as digital transformation and the shift to more sustainable business practices, particularly in energy, provides plenty of opportunities for active investors.”
Fleming said the themes flow through to the Salt global portfolios – managed by Morgan Stanley and Cohen & Steers – but also impact domestic assets.
“In NZ the old dividend-focused strategy emphasising nominal yields has become more brittle,” he said. “Also the local corporate debt market could come under stress – investors have not been through a normal credit cycle for a long time.”