Home / Analysis / Why instos should prize liquidity, not private markets

Big investors looking for diversification and new return drivers are diving deep into the private markets to find them. But liquidity is underrated, and Ninety One thinks they should be considering gold and commodities instead.

The bond/equity mix that underpins portfolio construction won’t turn permanently positive in the face of higher inflation, according to Ninety One, but it will be positive more often and weaker on average.

“For some, the answer is to add illiquid private market exposure in equities and credit,” Ninety One states in its 2024 outlook . “But in our view, illiquidity premia in some established areas are depressed and liquidity is insufficiently prized.

“This surely implies the need to embrace greater flexibility in terms of asset allocation, as well to consider other liquid candidates for improving diversification characteristics, such as gold and commodities.”

The bull case that Ninety One lays out for gold has at its foundation the wars and rumours of wars that have sporadically thrown markets into disarray. Geopolitical risk is likely to remain elevated, and gold has had a “remarkable year” – holding its own against the US dollar and in the face of sharply higher real interest rates. But the so-called “war premium” isn’t the only thing supporting that bull case; central bank buying hit a record in 2022, remained strong in 2023 and there’s no reason for the trend to reverse in the next few years.

“As yet, gold has not regained its place as a standard portfolio diversifier in the developed world but it could if faith in the typical 60/40 equity/bond portfolio continues to erode and greater diversification of assets is once again sought.”

Meanwhile, a tough backdrop for equities generally obscures the opportunities thrown up by extreme dispersion that itself flows from a “low-quality rally” driven almost entirely by the Magnificent Seven (Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta and Tesla)) and a narrative centred on the “transformative power of artificial intelligence”.

“The stock market’s winners always drive a disproportionate amount of a benchmark’s return, but this is extreme,” the outlook states. “The Nifty Fifty, the large-cap darlings of the 1960s and 1970s, were more than seven times as numerous. A truer story is probably told by the lacklustre returns on an equally weighted S&P 500 Index, the smaller-capitalisation US indices such as the Russell 2000, and ex-US global equity indices. They all highlight how narrow this rally has been.”

Emerging market equities are also primed to outperform as select countries – including Mexico, Vietnam and India – start to win big in a “new multi-polar world” created by the trend towards deglobalisation and nearshoring of manufacturing. Upward pressure on the US dollar is also likely to end, while the weaponisation of that currency against Iran and Russia has reduced reserve and transactional appetite for it.

“We are positive on emerging markets prospects over the medium term. They were out of favour in the last cycle, which was dominated by the US. Today, fundamentals in many developing economies are much improved and underappreciated. The emergence of a multi-polar world should strongly boost capital investment and growth across many parts of the developing world.”