Will the COVID-19 crisis mean we will be trapped in the lower for longer regime or are we on the road to a rate change? This session examined the proposition that we are in a “lower for longer” environment, explored whether a reflationary environment will prevail, and debated if growth is around the corner. The session also highlighted what these potential scenarios might mean for investors and identify opportunities from an investment perspective. 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Key takeaways
Inflation has become the number one investor worry according to a poll of delegates at FIS Digital 2021 with 51 per cent of respondents naming rising prices above any other risk.
But it might not be long-term. Country by country and demographic drivers are disinflationary, and today’s robust economic activity will tail off and economies will turn as sluggish as 2019.
Other panellists argued inflation could remain uncomfortably high. Even transient factors can take a while to unwind – particularly a labour shortage.
The longer inflation stays high, and the less pre-emptive central banks are in trying to curb it, the greater the risk.
Investors face challenges keeping to strategic asset allocations and navigating the impact of lost diversification between stocks and bonds.
One popular strategy comes via increased allocations to commodities where low inventories has left many commodity markets in backwardation. But looking ahead factors like China prioritising financial stability over growth could quickly change the picture. Moreover, if central banks turn hawkish, it bodes badly for industrial metals.
Elsewhere commentators said taxes will rise and this means deflationary forces could hold back the demand side. Systemic forces will also drive down inflation – taming inflation won’t just be the responsibility of central banks.
Many pension funds’ portfolios are not designed for unanchored inflation. Insurance assets like inflation-linked bonds or commodities are good in the short-term but don’t fit easily in a long-term portfolio.
Central bank credibility has provided an extraordinary backdrop to investment decisions – and any sense that discipline might be eroding could end badly for the portfolio.
What do you consider to be the biggest risk facing your portfolio right now?[vc_line_chart x_values=”” values=”%5B%7B%22title%22%3A%22Geopolitical%20risk%22%2C%22y_values%22%3A%2212%22%2C%22color%22%3A%22blue%22%7D%2C%7B%22title%22%3A%22Volatility%20of%20markets%22%2C%22y_values%22%3A%2222%22%2C%22color%22%3A%22pink%22%7D%2C%7B%22title%22%3A%22Inflation%20%22%2C%22y_values%22%3A%2251%22%2C%22color%22%3A%22mulled-wine%22%2C%22custom_color%22%3A%22%238d6dc4%22%7D%2C%7B%22title%22%3A%22Liquidity%22%2C%22y_values%22%3A%227%22%2C%22color%22%3A%22juicy-pink%22%2C%22custom_color%22%3A%22%236dab3c%22%7D%2C%7B%22title%22%3A%22Climate%20risk%22%2C%22y_values%22%3A%228%22%2C%22color%22%3A%22peacoc%22%2C%22custom_color%22%3A%22%2300c1cf%22%7D%5D”]
The big difference between the vaccine rollouts and the scale of the stimulus measures across the world could result in a K-shaped global economic recovery, with much of the developed world booming but poorer countries continuing to struggle. However the
Panellists discuss the possible impact of corporate failures on European banks coming out of the pandemic, and note central banks juggling act around digital currencies; unable to halt their arrival but still having to marshall progress and ensure the technology doesn’t weaken financial stability. The session examined the structural trends in the financial sector that have been entire amplified or altered by the COVID crisis.
Bridgewater’s co-CIO Bob Prince explains the perils of MP3 and suggests investors need to think differently, shaping strategies around cash-flow yields - connecting equity cash flows to stable sources of spending in the economy.
Investors need to ensure they are accessing the new economy if they are to benefit from the growth story that drives emerging markets returns. Investors at the Fiduciary Investors Symposium talk about how they allocate to emerging markets.
One of the silver linings of the pandemic has been that location is not a restraint on investment when it comes to investing in venture capital with investors seeing venture opportunities springing up in all corners of the world.
The interruptions to work and the revolution of technological tools in 2020 have changed thee way investors assess funds managers. A discussion around due diligence in a lockdown environment finds that allocators have tended to stick with existing relationships through the pandemic making it difficult for managers approaching investors for the first time to form relationships and win mandates.
The sharp market falls triggered by the pandemic brought the longest recovery ever in modern finance to an abrupt end. But despite the turmoil unleashed by COVID, it has not wrung out the market excesses of the last 13-year cycle. It means another wave of corporate failures could appear on the horizon in a shorter timeframe than expected, and offer more opportunities for distressed debt investors, according to Victor Khosla founder of SVP Global.
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