Some members are excited for retirement, while others approach it with a “real sense of shame and fear”. Funds are going to have to figure out how to cater to both groups – soon – or risk failing them all.
Investors have concluded “ABC” – Anything But China – but there’s a compelling case for this calculated risk, according to Ruffer’s Duncan MacInnes.
Why asset allocators shouldn’t fear the future
Investors have spent the past five years fumbling their way through the fog of uncertainty that descended over everything in late 2019, with each new inflation print or geopolitical flashpoint only seeming to further obscure the path forward.
But that fog now seems to be lifting, and Moz Afzal, chief investment officer of EFGAM – the asset management arm of Swiss private banking group EFG International – is “definitely more optimistic”.
“We’re in this sweet spot of benign economic trends,” Afzal tells ISN. “Quite frankly, if you think about the turmoil we’ve had over the past five or six years, between Covid and the distortions that created, the Russia-Ukraine War, now the war in the Middle-East, it’s been a pretty difficult time. And obviously then there’s inflation and central banks raising rates. We’re in a nice zone compared to where we’ve been, and that drives some of the optimism.”
But while the world might have become harder to navigate, markets haven’t. The United States has been a focal point of investor anxiety around the outcome of the Presidential election and the course that the Fed would take, but – looking backwards – a viable investment strategy would have been to hold nothing but US equities for the past five years (or even 40). That, to Afzal, reinforces the central tenet of long-term investing: don’t do too much.
“People got spooked during Covid, and then they got spooked because of inflation and high interest rates. But if you did nothing, you came out the other side with a much better outcome than if you’d started to aggressively trade any of those things. Be sensible; stay the course. If you’d done that, even in this tumultuous five-year period, you came out the other side much better.
“I always think you have about 70-80 per cent in staying the course. But at the margins you can add alpha if you look for cheap valuations or catalysts, and that’s what I do with my portfolio; I’ve just been incrementally adding.”
That remaining 20-30 per cent is also occasionally allocated to what Afzal calls “financial amusements”, or other asset classes that have experienced sudden surges in popularity as macroeconomic and business conditions align in their favour – like private credit, where EFGAM believes premiums have been eroded and investors aren’t always getting compensated for the risk they’re taking.
“The largest providers of private credit products have moved into retail,” Afzal said. “And that’s a clear trend. Ask yourself, why are they doing that? Because the largest institutional investors are no longer a growth driver for them. At the margin, they’re probably going to be net sellers, I’d guess. So you have to find another customer, and you’re seeing this packaging of products to retail because that’s their next growth engine in terms of fees and so forth.”
“There are some secular forces coming along. Trump deregulation for banks, because they used to do that type of lending. If deregulation allows them to go back into that business again it’ll drive down returns for the asset class.”
But if there’s a lesson from Trump’s first term for investors, it’s to not take him at face value; tomorrow’s Trump could look very different to today’s, and markets – which have been relatively buoyant since the election – are in their “hope” period, Afzal says.
“(Investors think) he’s going to deliver for us, he’s going to do deregulation, he’s going to do tax cuts, he’s going to do all the wonderful things he’s talked about. And there’ll be a honeymoon period that’ll last to the end of Q1, and then Q2 we’ll get down to business.
The key thing to watch now is not just whether Trump will keep his promises about corporate tax cuts and trade policy, but how he’ll go about keeping them.
“The horse trading will start in Q2 around whether those tax cut extensions are rolled over,” Afzal says. “If they’re not, and they’re not extended because Congress doesn’t allow it to go through, that could be a challenge for markets and the global economy. Those extensions are really important… I think it’ll be quite interesting to start drawing the battlelines around the extension of those tax cuts. The markets will be on a knife edge around that – particularly as one of his policies is cutting corporate tax.”
