Resilience, diversification and policy

The COVID-19 pandemic-induced paradigm of zero interest rates and coordinated monetary and fiscal policy is the new macro-economic reality. Add to that the market conditions from the US election and the ongoing pandemic, and investors head into 2021 with continued uncertainty. With this backdrop, diversification and resilience is more important than ever, but how can investors achieve that in a low interest rate environment?[vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Rebecca%20Patterson%22%2C%22job_role%22%3A%22Director%20of%20investment%20research%2C%20Bridgewater%20Associates%22%2C%22content%22%3A%22Rebecca%20Patterson%20joined%20Bridgewater%20in%20January%202020%20as%20director%20of%20the%20investment%20research%20group%2C%20where%20she%20is%20responsible%20for%20identifying%20and%20exploring%20areas%20of%20research%20across%20geographies%20and%20asset%20classes.%5CnShe%20has%20more%20than%2020%20years%20of%20investment%20management%20experience%2C%20and%20prior%20to%20joining%20Bridgewater%20served%20as%20chief%20investment%20officer%20of%20Bessemer%20Trust%2C%20overseeing%20%2485%20billion%20in%20client%20assets.%20During%20her%20time%20there%2C%20she%20was%20a%20member%20of%20the%20firm%E2%80%99s%20management%20committee%2C%20and%20helped%20launch%20their%20diversity%20and%20inclusion%20committee.%20Before%20joining%20Bessemer%20in%202012%2C%20she%20spent%2015%20years%20at%20J.P.%20Morgan%20where%20she%20worked%20as%20a%20researcher%20in%20the%20firm%E2%80%99s%20investment%20bank%20in%20Europe%2C%20Singapore%20and%20the%20US.%20She%20also%20served%20as%20a%20chief%20investment%20strategist%20in%20the%20asset%20management%20arm%20of%20the%20firm%2C%20and%20ran%20the%20private%20bank%E2%80%99s%20global%20currency%20and%20commodity%20trading%20desk.%5CnPatterson%20is%20currently%20a%20member%20of%20the%20Council%20on%20Foreign%20Relations%20and%20the%20Economic%20Club%20of%20New%20York.%20She%20previously%20served%20on%20the%20New%20York%20Federal%20Reserve%E2%80%99s%20foreign%20exchange%20committee%2C%20and%20later%20the%20investor%20advisory%20committee%20for%20six%20years%2C%20and%20has%20served%20on%20the%20University%20of%20Florida%E2%80%99s%20Investment%20Corporation%E2%80%99s%20advisory%20board%20for%20seven%20years%2C%20including%20three%20years%20as%20chair.%20She%20holds%20an%20M.B.A.%20from%20New%20York%20University%2C%20an%20M.A.%20in%20International%20Relations%20from%20The%20Johns%20Hopkins%20University%20School%20of%20Advanced%20International%20Studies%2C%20and%20a%20B.S.%20in%20Journalism%20from%20the%20University%20of%20Florida.%20She%20has%20been%20included%20on%20American%20Banker%E2%80%99s%20list%20of%20Most%20Powerful%20Women%20in%20Finance%20for%20six%20consecutive%20years.%20She%20is%20married%20and%20has%20two%20teenage%20girls.%22%2C%22image%22%3A%2235235%22%2C%22linkedin%22%3A%22https%3A%2F%2Fwww.linkedin.com%2Fin%2Frebecca-patterson-1b014592%2F%22%7D%5D” title=”Speakers” el_class=””][vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Colin%20Tate%22%2C%22job_role%22%3A%22Chief%20executive%2C%20Conexus%20Financial%20(Australia)%22%2C%22content%22%3A%22Colin%20Tate%20has%20been%20an%20investment%20industry%20media%20publisher%20and%20conference%20producer%20since%201996.%20In%20his%20media%20career%2C%20Tate%20has%20launched%20and%20overseen%20dozens%20of%20print%20and%20electronic%20publications.%20He%20is%20the%20chief%20executive%20and%20major%20shareholder%20of%20Conexus%20Financial%2C%20which%20was%20formed%20in%202005%2C%20and%20is%20headquartered%20in%20Sydney%2C%20Australia.%20The%20company%20stages%20more%20than%2020%20conferences%20and%20events%20each%20year%20%E2%80%93%20in%20London%2C%20New%20York%2C%20San%20Francisco%2C%20Los%20Angeles%2C%20Amsterdam%2C%20Beijing%2C%20Sydney%20and%20Melbourne%20%E2%80%93%20and%20publishes%20five%20media%20brands%2C%20including%20the%20global%20website%20and%20strategy%20newsletter%20for%20global%20institutional%20investors%20conexust1f.flywheelstaging.com.%20One%20of%20the%20company%E2%80%99s%20signature%20events%20is%20the%20bi-annual%20Fiduciary%20Investors%20Symposium.%20Conexus%20Financial%E2%80%99s%20events%20aim%20to%20place%20the%20responsibilities%20of%20investors%20in%20wider%20societal%2C%20and%20political%20contexts%2C%20as%20well%20as%20promote%20the%20long-term%20stability%20of%20markets%20and%20sustainable%20retirement%20incomes.%20Tate%20served%20for%20seven%20years%20on%20the%20board%20of%20Australia%E2%80%99s%20most%20high%20profile%20homeless%20charity%2C%20The%20Wayside%20Chapel%3B%20and%20he%20has%20underwritten%20the%20welfare%20of%2060%2C000%20people%20in%2028%20villages%20throughout%20Uganda%20via%20The%20Hunger%20Project.%22%2C%22image%22%3A%2231893%22%2C%22linkedin%22%3A%22https%3A%2F%2Fwww.linkedin.com%2Fin%2Fcolin-tate-839a5a181%2F%22%7D%5D” title=”Moderator” el_class=””]VIEW REBECCA’S PRESENTATION SLIDES HERE [vc_empty_space height=”10px”]

Key takeaways

• The COVID shock accelerated the shift to a new paradigm characterized by near-zero rates and coordinated fiscal and monetary easing (MP3).
• Beyond the US election and as the vaccine gets rolled out:

1. Policy certainty and economic mobility are likely to improve
2. Secular changes that drive the need for the new paradigm will remain

• Policy maker willingness, ability and effectiveness at stimulating post-COVID will heavily determine asset returns.
• This environment underscores the need for diversification in all forms: environmental, geographic and alpha/beta.
• We will have close to zero rates for years to come. Fiscal and monetary policy will work hand in hand to get the economy going.
• In the case of the election and the vaccine there is a clear positive and a question mark:

1. For Biden’s Presidency, the positive for investment is a return to more certain policies, which will support hiring and M&A. The question for the Biden presidency is will there be another pandemic relief package and also on January 5^th will Biden’s policies get greater support.
2. For the vaccine, the clear positive is the obvious link between mobility and GDP. The question is to what extent there will be outflows from COVID-focused businesses and inflows back into traditional businesses heavily impacted by the virus, and what are the implications for portfolio allocation if investors are looking for bond-like returns from equity investments given the low rate environment.

• Both debt and populism are globally high and rising. A vaccine won’t change this, therefore stimulus will be needed for years to come.
• Real yields can continue to fall so there is a place for assets like gold.
• The markets are not pricing in the possibility of higher inflation. Although there is uncertainty, the scope for inflation is greater than what we had in the past because we have not just monetary easing but also fiscal easing plus some of the forces pushing deflation (e.g. globalisation) are not as strong as they have been previously. Therefore some hedging against the risk of rising inflation may make portfolios more resilient.
• It is reassuring to know that you can have a balanced portfolio without or with reduced nominal bonds and achieve the same returns and diversification you need as an investor.
• Geographic diversification is more important than ever, which increases returns and reduces risk.
• Even when placing BREXIT to one side, the UK is likely to have one of the most depressed activity levels amongst the developed world. In the very short term, there is no good economic outcome for BREXIT, but the better news is that since the BREXIT process has been so slow prices mostly already reflect this. We are fairly anxious about sterling in this environment.

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Unanswered questions and answers