Is this a reset?

How global and local changes will drive the evolution of portfolio management.

A shift in geopolitics and economic policy

Inflation has surged and this has led to the end of the easy money era.

The Covid pandemic seems to have marked a transition point on a global scale. Pre-Covid we became accustomed to a world of ultra-low interest rates, low inflation and globalisation.

For me, the lockdown was a strange combination of general isolation and a sense of shifting tectonic plates, with market volatility running rampant. As the world has started to reopen, the full extent of these changes are manifesting and will have profound implications for how portfolio management is likely to adapt.

On the local front, the continued failure of state delivery, especially around Eskom and energy security, has dampened the prospects of economic growth. This together with the relaxation of exchange control, allowing up to 45% of retirement assets to be invested offshore, have profound implications for both the management of portfolios as well as the structure of the South African investment industry. The relative valuation of South African assets vs global assets, currency weakness and an expected slowdown in global growth have limited the extent to which investment managers have increased their offshore allocations. However, this is a temporary phenomenon and in time we will see investment managers materially increasing their offshore exposure to access the larger global investment opportunity set.

The South African investment industry will need to adjust away from a home bias and evolve their business models to credibly manage the offshore portfolios. I fully expect to see a level of consolidation in the industry, more partnerships with global asset managers and for those asset managers large enough, the establishment and expansion of globally focused teams and offices.

Another fundamental shift will be the need for portfolios to articulate their objectives more explicitly as the larger investment opportunity set will lead to higher levels of return dispersion between investment portfolios. As such, the need for funds to define and match their liabilities to appropriate mandates and portfolios more explicitly will become even more important. The importance of outcome-based portfolios will increase as general market portfolios may not meet investor needs.

Globally we are seeing a fundamental shift in geopolitics and economic policy.

Inflation has surged and this has led to the end of the easy money era. It seems that the TINA acronym no longer applies: “There is no alternative” is short for saying the best global investment opportunity set was in growth-orientated asset classes. This is no longer the case and global bonds and cash investments present better opportunities.

We expect that global inflation will reduce, but not to levels seen before the pandemic. This will imply that the allocation between global asset classes will become more important.

Mike Adsetts, Acting Chief Investment Officer, Momentum Investments

Over the last 20 years, we have seen the rise of China and there are now two global superpowers: China and the United States (US).

This power struggle has implications for globalisation and we are likely to see tighter integration regionally. This implies that investment managers will need to be more discerning about regional allocations. Thinking of the world in terms of developed and emerging markets will not be adequate to assess investment opportunities.

The rise of economic, social and governance (ESG) factors in investing and the challenge that energy security has posed must also be considered. Over the last year the relative outperformance of energy has raised the question of whether ESG is rewarded and in the US, Republican governors have openly driven an anti-ESG agenda.

I believe that this is a shorter-term phenomenon. The realities of climate change will continue to be imperative while considering the need for energy security. This potentially reopens the door for nuclear energy and in the longer term hydrogen-based sources of energy. Renewable energy will continue to grow but we need to be realistic that a swift transition may have unintended consequences.

In South Africa, we are especially exposed to the reality that a transition away from coal-powered energy production will be slower, costlier and more expensive. So how we approach investment and exposure to carbon-intensive industries will have to be nuanced, with a differentiated approach between South African and global investments. Portfolios will also need to assess the opportunities and effects of infrastructure investing, especially South African-based projects, with an increased exposure to these investments in portfolios.

Many other trends will also affect the investment universe, ranging from demographic trends to the role of digital and crypto assets as well as the social implications of increasing automation and artificial intelligence (AI). All these factors will result in investment managers and portfolios needing to evolve and adapt. This is both an environment of risk and opportunity. I, for one, am excited about this dynamic environment. Ultimately, what we do is in the interest of and for the benefit of our clients, and as we say here at Momentum Investments, with us investing is personal.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406).

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