IMCO World View: Accelerating deglobalisation v decelerating sustainability

Investors should expect more inequality, de-globalisation and volatility to influence their portfolios in 2025 alongside a heightened risk of unintended exposures. On the flip side, trends in the political environment that have supported sustainable investment have cooled, causing a temporary deceleration in momentum visible in the growing green and ESG investing backlash and US-China competition concerns.

That’s according to Canada’s IMCO, the $77.4 billion pension fund for Ontario’s public sector workers in its recently published World View 2025. IMCO uses its evolving framework of key world trends to distil high frequency news, developments and market movements into a guiding roadmap.

Importantly, these trends don’t evolve in a linear way but ebb and flow with more resonance in some years than others – although Nick Chamie, chief strategist and senior managing director in the total portfolio and capital markets division at the fund admits that this year the “Trump effect” has accelerated and decelerated the themes more than usual.

Accelerating trends include governments worldwide adopting interventionist policies aimed at reducing income disparities and reshaping socio-economic landscapes. Chamie says governments are acting to protect domestic jobs or bolster people on low incomes and lower the cost of living.

This means fiscal policy will increasingly be characterised by swings as governments introduce significant initiatives and stimulus into the economy. Policy will become the dominant force as opposed to the old orthodoxy of minimum government intervention. The days of governments just balancing the books and letting monetary policy do the fine tuning are in retreat, says Chamie who expects the impact will be felt in inflation, growth and stability.

If governments focus on stoking their own economies and addressing national interests inflation could become volatile and higher. At IMCO preparedness for this trend manifests in an important allocation to inflation-linked bonds to provide protection. Chopping and changing in government policy also underscores the value of diversification and spreading risk across different baskets, he says.

Chamie also observes accelerating trends around less free trade and countries prioritising domestic jobs at the expense of free trade, creating a much more fragmented world.  The impact could manifest in investment portfolios in emerging market allocations, for example.

“You can imagine tail winds for emerging markets will lessen in the new regime,” he says. “The fact that the US has outperformed global equity compared to the rest of the world by such a large margin shouldn’t be surprising.”

The need for investors to prepare for changes in government policy is particularly manifest in sustainability where IMCO carefully mitigates against ‘stroke of the pen risk’, designing an investment process that is not overly exposed to sudden changes in regulation or subsidy programs.

“We are always very careful to ensure that our sustainability program has resilience. Our underwriting process by which we evaluate risk always incorporates reducing and mitigating ‘stroke of the pen risk’.”

It’s all the more important given his prediction that global trends that have accelerated sustainable investment will decelerate in 2025. Chamie observes investor uncertainty around the level of resources to dedicate to climate change, and the policy and regulatory frameworks around sustainability. “Institutions are dropping out of and hesitating about joining alliances compared to previous years when sustainability had a strong tailwind attached to it.”

IMCO’s World View flags returning enthusiasm for private markets. When public markets dropped in 2022, many investors found themselves over allocated to private markets and a muted appetite for private investments in 2023 and 2024 followed. Today, he observes a shift, arguing that private markets will begin to regain the same tail winds as before.

In another, steady trend, index-based public market strategies will continue to underscore a shift in investor focus on long-term value creation. However, Chamie warns investors need to be cognisant of the concentration risks of passive investment.

“It’s easy in global equity to end up with a large concentration in the US of just a few names that are driving market returns. It’s very important to right-size these exposures and ensure awareness of just how volatile these markets can be. Investors that go all passive might be taking on more risk than they think.”

He said that active management helps mitigate this risk because it ensures the portfolio will look different to the benchmark.”

2025 will also require a flexible and agile approach to investment. IMCO doesn’t stay within specific asset class definitions when it looks for opportunities. The fund sees the world as one big ecosystem and recognises that many investments live in the space between public and private markets like structured transactions and private lending. Moreover new industries are evolving all the time.

Because the rate of change in the world has increased Chamie suggests investors adopt a flexible approach to ensure they tether to the strongest trends and mitigate the risks of the largest headwinds.

The latest trends also require an innovative approach and a preparedness to invest in new and different asset classes. For example, investors have built up their allocations to private credit after banks reduced lending to corporates. “The rise of private credit is an example of how investors need to incorporate new asset classes as they evolve,” he concludes.