Major trends and themes shaping future local and global investment decisions

The Covid-19 pandemic has accelerated significant changes in existing global investment trends, some of which will change or recede as normalcy returns with more vaccines. However, some trends are here to stay.

The main trends impacting investors are highlighted below by various commentators.

Janina Slawski, Head of Investment Advisory at Alexander Forbes, highlights the main trends impacting investors:

Responsible investment

Flows to ESG funds have been significant for both active and passive funds. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) entered into force on March 10, 2021 and generates significant flows to ESG labeled funds. The directive is part of the 2030 Agenda for Sustainable Development of the European Union and the United Nations. It aims to:

  • invest 1,000 billion euros in green investments over the next decade
  • address the inconsistency of climate-related information currently provided by financial market players
  • offer a competitive advantage to companies offering truly sustainable products.

SFRD has pushed investment firms to rush to label products as ‘sustainable’ as they seek to gain a booming market share that hit a record $ 2.3 trillion in the second quarter of 2021 .

Clients will focus more on financing for real impact, with increased demand for green bonds, sustainable equity strategies and other products that directly contribute to environmental or societal change. Investors will increasingly accept the need for urgent climate action, as collaboration between countries on specific issues increases. Investors will use more tools to influence companies and regulatory measures will reshape the industry.

Passive investment

The advance of passive vehicles is likely to increase in the US equity fund market by $ 11.6 trillion. Passive investing overtook active investing around August 2018; its current market share is around 54%. At least 42% of non-national assets are passive. The $ 6.2 trillion in passive assets still represents less than a sixth of the U.S. stock market, with a market cap of around $ 40.4 trillion.

Crypto-currencies against gold

The world has seen a vast expansion in money supply since the abandonment of gold standards. Cryptocurrencies have a market capitalization roughly the same size as the market capitalization of US small-cap stocks represented by the Russell 2000 Index. Bitcoin is predominant among crypto assets and offers some acceptance as a “reserve.” of value ”numeric or“ numeric gold ”. There is no central authority to alter the supply, so Bitcoin should benefit when authorities print more traditional money.

The market is vulnerable to manipulation by wash trading (essentially trading against yourself to create artificial activity), and regulation is always limited depending on the territory and type of activity.

Gold, on the other hand, has been a traditional store of value. It has generally shielded investors from large drops in equity markets in a low interest rate environment (bonds play this role in an environment of normalized interest rates). Conversely, when gold has done badly, the rest of a portfolio tends to do well. The bursting of the tech bubble and the Covid-19 crash events were examples where gold stocks provided excellent leveraged returns. It is becoming increasingly possible to access gold from responsible sources to manage environmental concerns.

Keep an eye on cryptocurrency news on Moneyweb Crypto.

Investing after the Covid-19 pandemic

As the global vaccine rollout continues, we are entering a new world and the impacts of change are global, Slawski said. She has the following views on investing after the pandemic:

The economic recovery appears to be well established, but the markets could easily start to move sideways. While massive stimulus measures still keep economies vibrant, higher inflation and rising bond yields look likely. The 2020 savings surge is unlikely to continue, and the end of the pandemic is already predicted for record valuations.

Several factors threaten to revive inflation. Whether current inflationary pressures are permanent or transitory is the subject of much debate.

Central banks are expected to tighten again, starting with a reduction in bond purchases.

While the dollar is still the undisputed reserve currency, cryptocurrencies are emerging as a potential medium of exchange.

Commodity prices have been falling steadily in real terms since the record highs began in the 1850s. However, this long decline has been punctuated by decades of booms. While there has been great excitement about the strong comebacks in 2020, one wonders if this will continue.

  • A return to emerging markets, driven by:
    – any continued recovery in commodity prices
    – growth among a few selected emerging countries (concentrated in Eastern Europe and Southeast Asia) which continue to grow thanks to the export of manufactured products
    – market-friendly economic reforms
    – the adoption of internet technology after the Covid-19 pandemic

Challengers on the rise

E-commerce giants have made huge gains in recent years, but the market capitalization of smaller and popular competitors is growing faster.

New media habits

The pandemic has changed the market for online shopping and entertainment, and this trend is expected to continue.

China

China is growing in importance in terms of global GDP, but is still largely under-represented in global indices. The advantages of the China onshore portfolio (Chinese A-shares) include:

  • higher economic growth which could lead to higher earnings growth and higher valuations
  • greater alpha potential given market inefficiencies
  • low correlation between onshore China and other stock markets

China and emerging markets are expected to represent a much larger share of the MSCI ACWI, with investors potentially allocating direct allocations to China in the future.

Nimisha Bhawan, head of investment advice, notes that in order to meet some of its challenges, China is willing to “hurt in the short term” to improve longer term prospects. China understands the importance of the private sector as a key engine for economic growth.

Although China faces additional regulatory risk and uncertainty is abundant, there are long-term opportunities as the size of its domestic market and higher R&D spending supports economic transformation and technological advancement. The tech boom is also helping traditional industrial and manufacturing sectors.

Macroeconomic themes

Gyongyi King, chief investment officer at Alexander Forbes Investments, identifies the following dominant global themes:

  • Global real estate has been the best performing asset class since the start of the year
  • Delta variant created additional uncertainty in the market
  • Growth fixed income outperformed defensive fixed income
  • Inflation risks could force central banks to tighten monetary policy
  • Chinese regulations, economic downturn and specific market events have impacted the markets

According to King, “Asset allocation (overweighted in growth assets) has been the main driver of outperformance results year to date and year to year. Strong absolute returns continue, but there are signs that they are starting to falter. Political actions (or mistakes) are expected to lead to short-term market volatility in China as well as the West.

Cyclical asset returns have started to falter as signs of return are hard to come by. Markets moved in the middle of the cycle as the global economic recovery continues to progress, but at a slower pace than before. The return of inflation, if it is permanent, is a significant risk for asset classes and the economic recovery.

It is important for South African investors to consider global investing in the context of their objectives, the opportunities presented by global themes, the diversification benefits that can be achieved, as well as the risks and desired long-term outcomes. .


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