November 9, 2021

Market Update – November 2021

Global economies and investment markets appear to have reached a triple turning point in the last few weeks:

 1. The slow retreat from sub-zero real interest rates.
The retreat by the major central banks has begun, and the process of withdrawing from quantitative easing is now underway. ‘Normal’ real interest rates may return by 2025, unless inflation gathers pace and outruns them. The recovery in real interest rates will play out over the next three to five years. It will reduce the value of future cash flows from all investments.
 2. Adapting to non-zero Covid.
Covid is being accepted as endemic- just another risk to public health and economic growth that needs to be managed and allowed for in assessments of prospective returns. This is not to say that there will not be some permanent changes in consumer or business behaviour that will have differential impacts on various countries, industries and companies.  The acceptance of non-zero Covid and its effects will also take place over a three-to-five-year period. It will continue to cause portfolio performance differentials depending on how well the portfolio managers adapt to the new environment.
3. The quest for net-zero emissions.
Decarbonisation of our way of life, the economy and business is now more seriously underway following COP26 in Glasgow. Significant pledges have been made by major countries to 50% reductions in carbon emissions within ten years, along with major reductions in the more harmful methane emissions and reductions in deforestation. All this may sound good but will probably fall short of what is needed to limit global warming to 1.5 or even 2 degrees Celsius. Nonetheless there will be major public sector and private sector investments in new technologies in energy production and distribution. There will be more prevalent carbon pricing including border adjustment mechanisms (tariffs), much bigger emissions trading systems and product specific carbon taxes.  The effect on investment markets of this belated but major effort in decarbonisation of the world economy will be much greater than either the restoration of above zero real interest rates or the acceptance non-zero Covid.

The crosscurrents created by these turning points in the flow of events will be difficult for investors to navigate, but they present opportunities as well as threats. There will be winners and losers among companies and countries, as we all struggle to adapt to the biggest change in investment markets since the early 1980s.

Investors should:

  • Maximise the asset allocation to equities subject to meeting their perceived need for a reduction in the shorter run volatility of portfolio returns. The more that short run volatility can be tolerated, the better the portfolio return will be in the longer term
  • Maintain a portfolio allocation to equities of at least 100% of the neutral or benchmark or long-term strategic weight for the relevant risk profile within the framework that applies to the portfolio.
  • Overweight developed market international equities but be careful about so-called emerging markets.
  • Underweight Australian equities, due to its concentrated composition and the risk inherent in its reliance on the Chinese economy.
  • Carefully and selectively manage investment in equities, due to the wide dispersion between winners and losers that is expected in the new environment. Investing through active equity managers with proven stock selection skills, regardless of how they are labelled (e.g., value or growth) is an optimum strategy to adopt.
  • Invest any so-called defensive assets (cash or fixed interest) with a shorter duration (to avoid losses if bond yields rise) and only in low or well-managed credit risk. Refrain from investing in cash or fixed interest that has significant corporate credit risk, unless it is via a fund managed by managers with proven credit risk assessment skills.

Extracted from Purvis Investment Market Conditions Report – 5 November 2021.   This information is general advice only and does not take into account your personal circumstances, goals and objectives. Therefore, you should consider its appropriateness for your circumstances before acting on this information.

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