Building portfolio resilience in navigating the global economic transition: the virus, stimulus, inflation and volatility
Global Investment Insights
with Scott Haslem, Chief Investment Officer, Crestone Wealth Management
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Scott is the Chief Investment Officer of Crestone Wealth Management. He is also a contributing author to the Financial Review where he regularly shares his perspectives on a range of economic, financial and geopolitical topics.
Previously, Scott was the highly esteemed Managing Director and Chief Economist, Head of Macro Research for Australia and New Zealand at UBS where he ran the consistently top-rated Australian economics team. During his career, Scott also spent seven years at the Reserve Bank of Australia, with a primary focus on economic activity and forecasting.
With the global economy currently going through a significant transition, Scott’s focus has been on following developments unfolding across the dynamic economic landscape.
He shared, “over the past year, immediately following the 2020 pandemic-led recession, we have been in an environment of unprecedented growth and unprecedented policy stimulus. But that is now changing. We are passing the peak of global growth. We are evolving into a world where growth will be very strong, just not as strong as it has been, and policy will be accommodative, just not as easy as it has been.
I am confident that in 2022 the world will normalise at a very healthy pace. But with the uncertainty of the rising delta variant, central banks reducing stimulus and stickier-than-expected inflation, markets are likely to be volatile and returns more modest over the rest of 2021. A key focus for me currently is working with our clients to manage through this transition, remain invested, avoid emotional decisions and lean on the proven benefits of portfolio diversification and quality-focused investments.”
Scott believes the current investment landscape is pervaded with a mountain of opportunities, but cautions that the challenge is in sorting through the noise that surrounds both the evolution of the global macro space and the impact of that on key thematics.
“Will governments ever pay off their debt, will interest rates ever rise and if they do, how will this impact valuations, particularly among the tech-dominant sectors.
In the short-term, the path out of the pandemic is creating many opportunities, but also risks for some sectors that may not recover.
Disruption and innovation continue to be a key source of return but avoiding the hype and seeking value through private equity and venture opportunities (and less so IPOs) is key.
Finally, the challenge of the undeniable need to view the entire investment universe through a sustainable lens is underpinning an exciting surge in opportunities, but again, due diligence remains key”, Scott highlighted as key considerations for investors to keep their eye on.
When thinking about structural factors inhibiting our industry in its ability to achieve better outcomes for beneficiaries, Scott emphasised that it is difficult not to think globally, as well as domestically. He made specific mention of the following factors which he sees as integral:
The well-intentioned actions by global central banks to zero the cost of capital for long periods of time are clearly impacting our ability to design efficient portfolios, undermining the fixed income asset class and driving asset prices to elevated valuations;
The social impact, as asset owners get rich and others fall further behind, is also having generational impacts;
The challenges governments globally and in Australia face in terms of providing clarity around targets like the UN SDGs and carbon-neutral goals is creating uncertainty regarding future investment risks and opportunities;
There is also the challenge financial advisers face of remaining well-informed in a fast-changing environment…delivering desired returns without exposing portfolios to unrecognised risks; and finally,
Our industry must continue to build trust among our clients, with a demonstrated focus on their interests, through transparency and unconflicted advice.
From a strategic perspective, Scott expects to see continued increases in allocations toward alternative (or unlisted) investments.
“That is not to say that we won’t remain eagle-eyed on delivering efficient, well-diversified portfolios designed to weather the ups and downs of the global cycle. But while many of our high-net-worth and family office clients already allocate our desired 20% or more to alternative investments, across the broader $24 billion of assets we have under advice, the average is close to 14%. Moreover, we expect the diversity of those alternatives portfolios to continue to increase, moving beyond hedge funds and private equity, toward real assets (including infrastructure, renewables and property) as well as distressed debt, single-asset real estate, late-stage venture. We expect this re-allocation to be increasingly funded from reducing government bond exposures and listed equities, with valuations across a range of institutional-quality unlisted investments in many cases less stretched”, Scott explained.
Scott left us with some of his perspectives on the need to build resilience both in portfolios and personally, with events of 2020 and 2021 helping to further confirm his beliefs.
Scott shared, “whatever stage of life we are in, we should always be looking for opportunities to build resilience. No matter how confident we are about how we think the future will unfold, we need to build resilience into our portfolios, through rigorous diversification.”
He continued, “if 2020 taught us anything, it’s that the future is unpredictable, most of the time. Unexpected events happen. The same year taught us that resilience (and reduced volatility) in portfolio returns is also achievable through proper diversification.”
“The other lesson of 2020 and now increasingly 2021, with seemingly unending virus-induced lockdowns and isolation, relates to building resilience in our relationships with our families, friends and colleagues. We never know when we will need to draw on the strength of others”, Scott concluded.
Disclaimer
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