There is no doubt that we are living in 'interesting times'. Geo-political conflicts rage in Europe and the Middle East, the political uncertainty surrounding Trump's second term and the potential for a renewed trade war, and the challenges of the global energy transition are fomenting social discord across the globe.
These concerns, and more, have been front of mind at LGT Crestone as we conducted our 2024 Investment Strategy Review. The upshot? The world is growing more complex, but astute investors can still thrive, so long as they lift their games and get more detailed, active, creative, and constructive.
Our secular outlook
In our view, the investment environment is changing fundamentally, as numerous forces buffet the foundations that underpin the global economy and financial markets:
We are now in a multi-polar world. The uni-polar, US-led international rules-based framework of the 1990s is giving way to a more complicated backdrop with more diverse actors on the world stage.
Policy and politics are tilting more populist and nationalist. Increasing societal inequity has shifted the median voter away from the conservative libertarian 'Reagan-Thatcher' era, while geo-political competition is driving more state-directed industrial policies, undermining 'comparative advantage' as the cornerstone of global trade.
The energy transition is picking up pace. The race to net zero is heating up as 2050 draws ever closer. Taken together, we see complex interactions between these shifts that will likely intensify their collective impact on the investment environment:
We see higher 'resting rates' for growth, inflation, and cash rates. The imperative to address the three mega-forces of geo-politics, politics, and the energy transition will likely underpin higher rates of economic growth, inflation, and policy rates going forward, particularly relative to the anaemic post-GFC paradigm.
We see more volatility and dispersion. Political and geo-political uncertainty, and the return of state-directed industrial policy, will likely drive greater volatility and dispersion across regions, industries, and individual companies.
Investors will need to lift their games to navigate this changing world
We don't see this outlook as entirely negative. In fact, we posit that there will be just as many opportunities as risks in this changing world, and investors adopting an overly cautious approach may miss out.
That said, a more complicated investment environment will no doubt challenge traditional set-and-forget strategies. Instead, we call on investors to get more detailed and active in outworking their investment strategy, and more creative in building portfolios and considering opportunities.
We practice what we preach and have developed a proprietary multi-asset risk factor framework to uplift our own capabilities for this new world. Our enhanced approach rests on a fundamental belief: that the behaviour of asset classes can be explained by a set of underlying factors (such as economic growth or equity risk), analogous to how different-looking substances like diamond and graphite are composed of the same underlying element, carbon.
This powerful lens gives us a robust foundation for understanding risk and building portfolios for this new world, and underpins the key outcomes of our 2024 Investment Strategy Review:
We have lifted our (already significant) allocation to alternative assets, which includes private markets, real assets, and hedge funds. Alternative assets provide exposure to a broader and richer set of risk and return drivers compared to traditional equities and bonds. These include idiosyncratic opportunities that are unavailable in public markets and esoteric exposures like music royalties that are less linked to the economic cycle.
We also lift our cash allocations, as higher interest rates reduce the opportunity cost of holding cash, which also provides optionality to respond to market dislocations.
We have refreshed our equity allocations, including a higher conviction preference for global equities to take advantage of a broader market, more exposure to secular opportunities like AI, and the valuable diversifying qualities of foreign currency exposure.
We have tailored our fixed income allocations to leverage currently high interest rates, while recognising the portfolio diversification challenges of shifting equity-bond correlations.
We re-emphasise our preference for active management - more volatility and dispersion should give high quality active managers a richer opportunity set to outperform.
We are not afraid of currently elevated markets. Opportunities abound beyond headline indices, and if our secular view for higher growth and inflation plays out, investors will benefit over the long term from being exposed to this through a well-diversified, multi-asset portfolio.
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