As ASI’s Chief Investment Officer, it gives me great pleasure to be invited to write this introduction to Global Outlook. I am conscious that I do so at an important juncture for both markets and for the asset management profession as a whole.
The recent good news on a vaccine gives us considerable hope for the year ahead. However, the pandemic has left the global economy permanently scarred resulting in rising levels of unemployment and it will leave governments and the corporate sector with higher levels of debt than most of us have ever seen. All of this results in one of the most uncertain market landscapes that I have seen. This calls for care in the selection of markets, sectors and securities in order to ensure that portfolios can cope with what we expect – but also with the unexpected. The articles in this issue give some flavour to the care that we are taking and to the breadth of experience of the teams exercising it.
At the same time as navigating these difficult market waters, we as a profession have never been under greater scrutiny by the many stakeholders who have an interest in our activities. This is welcome. The way in which we behave as owners of the equity or debt of the companies in which we invest impacts everyone. How we act in the markets has a far-reaching impact beyond just fellow participants. Our consideration of issues such as the environment, both as a company and as shareholders and debtholders, has never been more important. This issue of Global Outlook touches on many of these areas and on the responsibility resting on our shoulders as stewards of our clients’ assets.
Our first article, What happens now? Six macroeconomic scenarios for the post-Covid world, asks us to look beyond the short-term news of virus and vaccine. Luke Bartholomew outlines six macroeconomic paths that we might follow, all of which are possible. He attaches probabilities to these different potential ‘states of the world’. The picture he paints is an interesting one, but it also serves to highlight the uncertainty I noted above.
In our second article, The outlook for assets in the post-Covid world, the Strategic Asset Allocation team takes these potential economic paths and suggests what impact they may have on both risk and risk-free assets. The article outlines our expectations, but also notes the unusual starting point, with such low (or in some cases negative) bond yields making the diversification problem a more difficult one than normal.
Our next article, Laying to rest the ghosts of inflation past, considers the prospects for inflation. This is a timely article with some investors starting to worry about potential inflation, either driven by the various forms of economic stimulus, the global economy or the supply-side economic impact of the virus. In the article Jeremy Lawson clearly sets out why a more sanguine view remains appropriate, while noting that investors will periodically worry – as they have done for the past decade.
Issues around the climate correctly continue to be front-of-mind amongst our investors and our clients. There is therefore a growing appetite to make portfolio allocations in a more climate aligned way. In his article, Assessing the strategic climate investment opportunity, Craig MacKenzie outlines how we have been working to address these demands by exploring how the climate transition might affect the long-term returns of our clients’ portfolios and how we use our climate scenario tool kit to understand and help to manage this.
Our next article, Oil, electric vehicles and the environment, from Robert Minter complements Craig’s piece and is a reminder of the scale of the task to reduce our dependence on the internal combustion engine and on the oil market more generally. It is also a reminder that around the unstoppable trend towards renewables, there are economic and business cycles within the oil market which we also need to be aware of as we manage this important transition.
Next we move to real estate, and in particular the office sector. Many of us will have worked from home since March. The question for office owners and users is whether this new-found flexibility is here to stay and if so, in what form. In this article, What does the future hold for the global office sector?, David Scott and Jason Baggaley tackle these questions. They don’t ring the death knell of the office, but note trends that were in place before the virus and the increasing requirement to be careful in the selection of properties.
Next, to China and to the Chinese bond market. Don Amstad’s article, China bonds – open for business, takes us back to 1978 and the economic seeds planted by the, then, President Deng Xiaoping. Those seeds have certainly blossomed, given the performance of the Chinese economy since. The article focuses on what is now the world’s second largest bond market – but a market where foreign investor only make up 8% of the market. The definition of a high yield has somewhat reduced over the past few years, but yields of 3% in China certainly offer richer pickings many other geographies.
Our final article chimes with Don’s one, in the sense that it suggests alternative sources of income in a world where income is increasingly scarce. In this article, The benefits of an allocation to private credit, Albane Poulin takes us to the world of private credit. In this market we obviously give up liquidity in order to achieve higher yields. However, the reduction in liquidity also opens up markets less available in the listed sphere. Hence in this piece we discuss lending to finance social housing, universities and infrastructure.
This issue of Global Outlook paints across a broad canvas, from equity to debt and from public to private. Whatever the economic outlook, there are always opportunities in markets. I hope that this issue has highlighted some of them, but, as importantly, has also highlighted the rigour which goes into their selection. I hope that you enjoy it.