Partner Insight: How can we unlock opportunity in a new market regime?

Partner Insight: How can we unlock opportunity in a new market regime?

Several multi-decade trends have recently come to an end, and investors are contending with a world that is less connected, less stable geopolitically, and potentially more inflationary. Against this complex backdrop, Newton CEO Euan Munro explores how pension fund investors can seek to unlock opportunity.

For a long period, the investment backdrop had been characterised by low nominal interest rates, together with low and stable inflation. Central banks had lowered rates such that borrowing costs in most of the developed world ended up close to, and in some cases below, zero. Meanwhile, levels of sovereign debt, already enlarged in the years following the 2008 global financial crisis, were further expanded by the Covid pandemic to reach heights not seen since the second world war.

As governments were borrowing, their central banks were helpfully buying up their debt and growing their own balance sheets through quantitative easing and lowering interest rates. A rising tide lifted all boats; the prices of equities, bonds, property and most other asset classes rose strongly. In this environment, the value of portfolio diversification was frequently questioned, as it appeared to add little material benefit to the ultimate outcome.

Navigating complex structural change

Since the world began to emerge from the pandemic, it has become increasingly clear that a number of inflection points have indeed been reached. Consumer price inflation rose to 40-year highs across developed economies in 2022, and central banks aggressively raised interest rates in an attempt to contain it. Furthermore, major central banks began the process of balance-sheet reduction. These conditions led to one of the worst bond market sell-offs in a generation, with classic diversification again proving unhelpful as equities fell in tandem.

While rates of headline inflation have more recently been falling, and financial-market participants have been pricing in a series of interest-rate cuts, we believe that, now these inflection points have been reached, investors are facing a very different regime and are unlikely to see a return to the benign conditions of the previous decade.

It is not just monetary boundaries that have been reached or redrawn; economies are being influenced by several broad structural trends. Growing geopolitical tensions, as exemplified by the conflicts in Ukraine and the Middle East, as well as continuing strains between China and the US, have been leading to heightened volatility. Changes in trade, immigration and labour participation are raising the bar on inflation. In addition, there is a tendency for governments to be more involved in economies through increased defence spending, social support and climate financing.

Unlocking tomorrow's investment opportunities

Against this complex backdrop, we believe it will be more important than ever for pension scheme investors to take a future-facing approach that is equipped for the world as it is and will be, not one that is founded on outdated assumptions from the past.

In an environment where the overall market may not reliably deliver returns, an investment approach which exploits an unusually wide and innovative range of inputs in its idea generation may be increasingly relevant.

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Important information

This is a financial promotion. These opinions should not be construed as investment or any other advice and are subject to change. This document is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that portfolio holdings and positioning are subject to change without notice.

Issued by Newton Investment Management Ltd. ‘Newton' and/or ‘Newton Investment Management' is a corporate brand which refers to the following group of affiliated companies: Newton Investment Management Limited (NIM), Newton Investment Management North America LLC (NIMNA) and Newton Investment Management Japan Limited (NIMJ). NIMNA was established in 2021 and NIMJ was established in March 2023. In the United Kingdom, NIM is authorised and regulated by the Financial Conduct Authority (‘FCA'), 12 Endeavour Square, London, E20 1JN, in the conduct of investment business. Registered in England no. 01371973. NIM and NIMNA are both registered as investment advisors with the Securities & Exchange Commission (‘SEC') to offer investment advisory services in the United States. NIM's investment business in the United States is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. NIMJ is authorised and regulated by the Japan Financial Services Agency (JFSA). All firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon').

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