A ‘new regime’ for multi-asset investing
In what ways has the world changed since the end of the pandemic? Will those changes continue? And what implications does regime change have for multi-asset investors?
If you’ve attended one of our presentations or webinars over the past few years, you’ll have heard us explaining why we believe the world is in the middle of a process of ‘regime change’ of the type only seen once every few decades. You’ll probably also have seen a version of the table below. It contrasts the winners of the decade that followed the global financial crisis with the beneficiaries of the new political, economic and financial regime. We initially drew it up to help clarify our thinking about the big picture for equity markets but it also carries important implications for multi-asset investors.
| Then... | Now... |
|---|---|
| Quantitative easing (QE) | Quantitative tightening (QT) |
| Worries about deflation | Uncertainty about inflation |
| Austerity |
Debt-to-GDP >100% |
| Long-duration government bonds |
Short-dated corporate bonds |
| Globalisation |
Nearshoring / autarky |
| Peace | War |
| Capital-light platforms |
Capital-intensive industries |
| Profitless growth |
Dividend yields |
| Just-in-time supply chains | Just-in-case inventory |
When we first drew up this table, quantitative easing (QE) was still holding down long-dated bond yields, Russia had yet to begin dropping missiles on Kiev and interest rates across the West were close to zero. At that time, our preference for owning the shares of defence contractors, banks and companies controlling tangible assets in the ‘real world’ looked out of step with a broader market fixated on long-duration growth stocks with intangible assets.
The dramatic sell-off in bond markets in 2022, however, marked a watershed: the end of the pre-pandemic monetary regime. Russia’s wholesale invasion of Ukraine, meanwhile, gave vivid expression to the world’s ongoing descent into a less stable geopolitical era.
And now?
- As the world has become less peaceful, defence stocks have performed incredibly well.
- The rise of political populism (itself a reaction to the rising inequality that a decade of QE fuelled) has seen decades of globalisation being replaced by nationalism and the onshoring of strategically important industries.
- Building and powering AI data centres – and incorporating renewables – has propelled demand for semiconductors, smart power grids and nuclear reactors.
- With interest rates and bond yields having moved meaningfully higher relative to their pre-pandemic levels, the profitability of banks and insurers has been transformed.
In the new regime, we are not expecting to ‘buy and hold’
Our expectation is that the world described in the left-hand column of our table will continue to give way to the one on the right. That process won’t, however, always be smooth; it will come in fits and starts. There will be reversals. In contrast to the decade in which QE artificially suppressed volatility and pushed the valuation of long-duration assets steadily higher, its withdrawal seems likely to provoke it.
The new regime may not necessarily be an environment in which it pays for multi-asset investors to run their winners – but instead to be active and agile. That suits us.
In bond markets, the explosion in debt-to-GDP ratios across much of the world may suggest that it would be imprudent to take a ‘buy-and-hold’ approach to government bonds, particularly at the long end of the curve. In equity markets, investors will need to be nimble and be prepared to take short-term tactical positions that may be at odds with the long-term direction of travel. The new regime may not necessarily be an environment in which it pays for multi-asset investors to run their winners – but instead to be active and agile. That suits us.