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Sustaining returns for the future

(ATF) The global economy entered recession in 2020. The Covid-19 pandemic was a surprise for everyone. Central banks cut policy rates aggressively. Governments implemented large fiscal support packages. Widespread lockdowns persisted through the year. A vaccine was developed within the year! The recession was short. And financial markets delivered great returns.

2020 was about reviewing resilience and reducing surprises.

Each year in February, I set out our Medium-Term Global Outlook. I look out over the next five years and identify themes that will materially impact portfolios over the medium-term. In early February 2020, I recommended investors prepare for a shock. I reviewed the resilience of our portfolios. And I positioned the portfolios to reduce surprises. I did not know there would be a global pandemic. But the Medium-Term Global Outlook provided a clear roadmap for coping with the crisis. And that roadmap helped our portfolios capitalise on great returns. 

2021 is about sustaining returns for the future.

Our economic outlook is for accommodative monetary policy, with normalising economic activity and inflation returning to historically average levels. That will be accompanied by low market volatility. There are risks to this view. But it is an outlook where tailwinds persist for risk-adjusted returns on growth assets.

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The outlook is still uncertain. And investing naturally involves taking risk. In the Medium-Term Global Outlook, I focus on adding value over the medium-term. After a great year in 2020, our Medium-Term Global Outlook is focused on sustaining returns for the future. It makes recommendations across five key themes for the next five years.

Theme 1: The start of a new cycle.

An enormous amount of monetary and fiscal policy support was released during and after the Covid19 crisis. This acted as a circuit breaker for the mature economic cycle. The new cycle will continue to have low rates for years to come. Policy support will be reflationary. And financial repression will support a low volatility environment. This means equity beta will be rewarded. In this environment, we think emerging Asian equities in general, and Chinese equities in particular, will benefit.

Theme 2: Use scenarios to manage surprises.

Economic risks are skewed to the upside. But the outlook is uncertain because we are at the start of a new economic cycle. I have considered three scenarios around our base case to assess the impacts on the outlook. These are:

  1. a technology boom that increases productivity, long-term growth and equity returns
  2. an inflationary shock that causes central banks to hike too soon, creates a recession and crushes equity returns, and
  3. a US-China trade war where relations sour, trade slows and a global recession drastically lowers equity returns. These scenarios are an important tool in protecting against economic surprises.

Theme 3: Reaching for yield in a low-rate environment.

Global central banks have cut rates to near or below zero. Time deposits and developed market sovereign and investment grade bonds cannot deliver on investors’ income needs. This will drive a focus on alternative sources of income. Chinese and emerging economy fixed income markets will be a critical source of income and returns in this environment.

Theme 4: The growth of China.

China was the one of the first countries to come out of recession in 2020. It is the second largest economy in the world and has the second largest equity markets in the world. It has a deep and liquid fixed income market. But foreign investors only hold about 3% of the Chinese A-share market and 2.4% of the nation’s bond market. 

China is structurally under-owned by international investors. Over the next five years, investors that have no exposure to China will be taking a significant active risk relative to the benchmark. China’s opportunity is diversification and alpha for investors – and the time to access that opportunity is now!

Theme 5: Integrate sustainable investment.

Sustainable investing has grown rapidly in recent years. This growth has been led by demand that is now trickling down to retail investors not just in the large developed markets, but through Asia too. The growing realization that sustainable investing is a clear source of alpha is an important part of that demand. 

Companies are responding and implementing sustainable policies. We expect the growth of sustainable investing to be most noticeable throughout Asia over the next five years. Asia as a region is further behind the journey compared with Europe, the US and other developed economies – but that means the opportunity for catching up, and generating genuine alpha, is enormous!

Embrace the medium-term now to sustain returns for the future.

Our philosophy is that investing over the medium-term is more appropriate than fixating on the near-term. Over the next five years, accessing these themes may help generate superior risk-adjusted returns. But the point is, it is time to start implementing now to sustain strong returns for the future.


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