The four themes affecting your investment returns in the 21st century
30 January, 2020
Over the past 100 years, we've seen income, inflation, interest rates and investment returns being “boosted by a heady mix of demographics, debt and disregard for the environment”.
That's according to the recent The 21st Century Portfolio report from investment management firm Invesco, which says: “In short, we have been living beyond our means".
For the rest of this century, Invesco — which manages assets of $1.2 trillion (Dh4.5tn) globally — says four key factors will play a role in how to build the right investment portfolio: low bond yields, demographics, climate change and technological innovation.
We have to get used to the idea that on equities and real estate, the returns are going to be lower than they have been. But also if we do nothing about climate change, you have to revise your ideas even more.
Paul Jackson, global head of asset allocation research at Invesco
The impetus for the research was to address the question “what would I put in a pension portfolio for somebody being born now?”, Paul Jackson, global head of asset allocation research at Invesco and co-author of the report, tells The National.
The four themes are interlinked, he adds. For example, low interest rates make it easier to finance investments, but low bond yields penalise investors; investments can help develop technological solutions for climate change and decelerating populations, which otherwise would dampen economic growth.
“From an investment perspective, we have to get used to the idea that on equities and real estate, the returns are going to be lower than they have been. But also if we do nothing about climate change, you have to revise your ideas even more,” says Mr Jackson, who is also head of Emea ETFs' Research.
The bottom line? Invesco suggests a portfolio looking to the future has a core of equity and real estate assets — which give higher returns than fixed-income assets — and four satellite portfolios focused on Africa, carbon-reducing technology, carbon-removing technology and labour-replacing innovation.
Here we break down the factors that we, our children and grandchildren should keep in mind when investing over the next 80 years.
Low bond yields
Global negative-yielding debt peaked at $17tn last August, due to a bond rally triggered by fears of an economic slowdown. While a brighter outlook, with the recent phase one trade deal between the US and China and diminishing concerns over a no-deal Brexit, shrunk the amount a little, it now sits at $12.4tn on coronavirus fears, according to Bloomberg.
However, downside risks of global economic growth remain, according to the International Monetary Fund, which revised its growth estimates slightly downward to 3.3 per cent in 2020 and 3.4 per cent in 2021.
Some economists and investors have blamed the shift to negative interest rates on long-term factors, such as the ageing of developed world populations and an increase in savings versus investments following the 2008 global financial crisis. But they are also pointing fingers at the ultra dovish policy of certain central banks.
“The large developed world central banks have been throwing good money after bad,” Mr Jackson says.
The European Central Bank, the US Federal Reserve, the Bank of Japan and others have decreased interest rates in recent years in an effort to spur economic activity and get inflation up.
“They are going too far in this effort and I think that they just have to accept that inflation is going to be much lower than we have seen during our lifetimes,” Mr Jackson says.
Invesco’s report states that inflation will likely return to the 0 per cent to 2 per cent range that prevailed on average for much of pre-World War 2 history. “We also believe that developed world central banks will struggle to consistently meet the 2 per cent rate that many of them target,” the report says.
While some central banks, such as Sweden's Riksbank, have recently moved away from negative interest rates, Mr Jackson expects that if the global economy does go into recession in the next two to three years “they may have to revert to those negative interest rates for cyclical reasons”.
Portfolio recommendation:
“Even if you buy a 100-year bond … in most of the countries that you would think about investing in … the yield that you can get over 100 years is 1 to 1.5 per cent. Which, let’s simplify, and say that is zero in real terms,” Mr Jackson says.
“There is no role in those optimised, long-term portfolios for fixed income assets.”
Source: www.thenational.ae
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