Viewing asset management through a new lens
The drama of a global pandemic has been extraordinary, and it should make all of us take stock of the world we now occupy. As investors, such contemplation is even more relevant as we also assess the apparent short-term disconnect between the V-shaped recovery in financial markets and the ongoing distress in the real economy.
Understanding that disconnect is an important requirement before we even attempt to predict the future, why is there such a significant disconnect between financial markets and the real economy?
One word – liquidity
Central banks and governments have responded to the crisis with substantial, sustained and co-ordinated monetary and fiscal support. This is the playbook response to a financial shock that these entities established after the global financial crisis (GFC). Major interest rate cuts, quantitative easing and aggressive fiscal spending have been initiated, injecting massive liquidity into the financial system. As in the GFC, this liquidity has seeped into financial markets, resulting in asset price appreciation even before the process of economic recovery has begun. The stimuli of 2020 have exceeded the GFC period, both in size and global co-ordination, resulting in a very rapid recovery in financial markets, despite the ongoing traumatic implications of the pandemic for the real economy.
What’s different this time around?
A key differentiating factor relative to the GFC has been the nature of equity gains. These have not been broad-based but concentrated in certain sectors, particularly in US technology and consumer-related areas. This is understandable and reflects the diverse influence that the virus has had on different sectors of the economy. Some industries have been permanently scarred, while others have experienced accelerated growth in their long-term prospects. Many investors, particularly if anchored in a traditional mindset, have struggled to navigate these markets and have been forced to question whether these trends are temporary or more permanent in nature. We feel they are permanent, and that investors need to think differently about the future. Over the last three years, STANLIB’s investment platform has been proactive in responding to the structural changes evolving in our investing universe.
|We firmly believe that COVID-19 is both a catalyst and an accelerant for further change.|
Accelerating consumer trends and government control
Thinking differently will involve recognising that COVID-19 will have important social and governmental consequences. For the broader society, the pandemic has forced some behavioural changes that we believe are unlikely to be temporary. The influence of the digital economy has exploded across all sectors of the economy, accelerating an underlying trend that has been evolving over the past decade. Five years of future digital growth has been compressed into a few months due to this global pandemic, and not just in the business-to-consumer segment, through companies like Takealot and Amazon. The business-to-business environment is also evolving to capture the opportunities associated with digital tools and disruptive business strategies. This is even occurring in traditional sectors where previous digital acceptance has been low. We also need to think differently about the influence and reach of governments in the future. The days of political acceptance of a pure laissez-faire market economy are behind us. Around the world, including in SA, governments have been central to the COVID-19 response, although with varying degrees of success and competence. Politicians will be reluctant to vacate this role in society and in the economy, and we anticipate that post-COVID-19 there will be greater governmental involvement in our personal and business lives. Within this shift, there will be pressure for corporates to assume a greater responsibility towards a broader group of stakeholders – potentially hurting profitability.
What about our own industry?
Thinking differently will also make sense for asset managers. At STANLIB, we have thought deeply about the implications for asset management, both for our decision-making processes and our product development. For example, we believe that the value equity bias and low level of asset-class diversification evident in South African, balanced funds needs to evolve.
The lacklustre performance of SA Inc shares this year, building on a disappointing trend over the last few years, is cementing our concerns about investors’ historical over-reliance on value-style domestic equities in constructing multi-asset portfolios. The future will require broader diversification in asset class exposure, implemented in both international and South African building blocks. A controlled exposure to alternative assets, such as infrastructure, private equity and private debt, can deliver equity-like returns while providing crucial portfolio diversification.
More sophisticated risk management disciplines are also critical, as the issue of consistency of investment returns is becoming an even more pressing concern for clients. The era of consistent ‘easy’ equity returns is almost certainly behind us. Accessing a broader source of returns will be demanding and will require new skills. Quant analytics and artificial intelligence are such skills for the evolving asset management industry – exciting for a progressive mindset, but terrifying for a mindset anchored in the past.
The need to think differently is all around us. In the midst of all of this change, it would be wrong to assume that everything reverts to normal post-COVID-19. The pandemic has been a catalyst for change and, in several areas, has resulted in a dramatic acceleration of a structural trend. It is important, as both individuals and investors, that we do not dismiss the implications of these trends for our lives.
Simply believing that what worked for the previous 15 years will work for the next 15 years, is naïve. For investors, navigating such a fluid environment will require consideration and a greater appreciation of asset management disciplines, including diversification and risk management.