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Notes on a crisis: why the music could be noisy


Almost all global pension investors expect post-COVID financial markets to follow a ‘W’ path or play an accordion-like tune, a new survey has found. Whatever the shape of the future, it will not be smooth.

The study, by UK-based research firm Create, shows almost half of the respondents projected a W-shaped recovery ahead while 36 per cent forecast an accordion future featuring “a series of mini bull markets within a prolonged bear market”.

As well as a prolonged period of volatility, 90 per cent of institutional pension investors surveyed had factored in an era of asset class returns doomed to be “lower in this decade compared with the last one”, the report says.

  • And with central banks also likely to lose “potency” to influence markets along with rising inflation expectations (almost 80 per cent of respondents tipped a post-crisis surge), pension funds will have to pursue markedly different investment strategies in the years ahead.

    The report, ‘Creating Resilient Pension Portfolios Post Covid-19’, produced in association with French investment giant Amundi Asset Management, found about 75 per cent of respondents plan to focus on private markets and “high-quality” cash flow-compounding global equities to tide them over. Furthermore, about 60 per cent will increase exposure to “thematic investing” while developing extensive forward-looking scenario-planning tools to complement more “conventional risk models”.

    But if the combined fiscal and monetary emergency measures launched to combat the COVID crisis have upended long-held investment assumptions, the 2020 shock has also confirmed environmental, social and governance (ESG) strategies as mainstream, the survey found.

    Over 80 per cent of respondents plan to increase ESG allocations to “cater for fat-tail, far-off risks”, the Create report says, while 61 per cent expect the approach to deliver better “risk adjusted returns”.

    “The pandemic has vividly shown how physical shocks – unlike economic ones – can roil the markets and whipsaw pension portfolios in ways previously unimaginable. Investors now have a foretaste of some of the old ‘unknown unknown’ impacts of climate change and societal upheavals,” the study says.

    “By factoring the future into the present, environmental, social and governance funds have shone despite pronounced market volatility in March 2020. They are no longer seen as purely a bull market luxury. Their resilience owes more to stock selection than sector bets.”

    Ongoing market jitters, increasing inflation (or possibly ‘stagflation’), political tilts to “wealth distribution” and central bank impotency set the scene for three possible outcomes, the report says, including: moral hazard fueled by outsize government stimulus; rising prices; and, volatility spikes due to “serious overreach” from monetary authorities.

    In the post-COVID era, investing will likely be framed around a single principle dubbed “antifragility”, the Create study says, implemented via portfolio management strategies focusing on liquidity and “resilience”.

    As investors seek all-weather assets, stretched total market valuations could ease.

    “… asset prices are likely to reconnect with their fair value, as central banks’ role in artificially inflating asset prices and controlling volatility crosses the point of diminishing returns,” the Create report says. “Previous rounds of quantitative easing have brought forward future returns in an environment of anaemic global growth.”

    As low returns bite, the study says investors will target four goals through asset classes as below:

    • capital growth – global, emerging market and high-quality equities;

    • income generation – infrastructure, investment grade bonds and alternative credit;

    • inflation protection – equities and infrastructure; and,

    • asset conservation – sovereign bonds.

    Amin Rajan, Create founder, said the extraordinary financial responses during the COVID period “has found ready resonance among pension investors worldwide, as they survey the carnage inflicted on their balance sheets by the devastating coronavirus crisis”.

     “But, alas, the matter does not end there,” Rajan says. “While welcoming the immediate and unprecedented stimulus by central banks and their governments in all the key economies, there is now ample recognition that it comes with downside risks that are too big to ignore.”

    The 2020 Create survey, tapping the views 158 pension fund respondents from 17 jurisdictions representing about €1.96 trillion of assets, is the next instalment in an annual series dating back to 2014.

    – David Chaplin, Investment News NZ

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