IN FOCUS6-8 min read

Investing in the decade ahead

The early years of the 2020s have seen profound shifts in the global economy and markets. This means the decade ahead is likely to look very different from the recent past. Here are four of the key issues we are thinking about.

13/02/2023
china-usa-concept

Authors

Simon Cooper
Head of DFM
Christopher Lewis
Head of Investment Strategy, Wealth Management

Over the last decade, private client asset managers have had to navigate a multitude of scenarios that have tested their resilience, resources and conviction in their investment process. Firms have had to steer portfolios, and their own businesses, through a terrifying global pandemic, the highest inflation in decades, a real war in Ukraine and “trade and technology wars” between the world’s two largest economies. The UK has faced additional uncertainty as a result of Brexit and, since then, four prime ministers and seven chancellors of the exchequer.

One thing Cazenove Capital clients have learned over this period is that a global, agile and highly-resourced investment manager can provide stability and reassurance in times of uncertainty - without surrendering returns. Our flagship growth strategy has gained 78% after fees in the ten years to the end of 2022, meaningfully ahead of the peer group on 65% (based on ARC’s Steady Growth Private Client Index).

Performance ahead of peer group and inflation benchmark

Performance of Cazenove Capital’s growth strategy vs. ARC Steady Growth Private Client Index and UK CPI + 4%.

607459_investing_decades_ahead_fig1

2018

2019

2020

2021

2022

Cazenove Capital Growth Strategy

-5.9

16.8

11.1

8.8

-8.0

ARC Sterling Steady Growth PCI

-5.6

15.0

4.6

10.2

-10.2

UK Inflation (CPI) + 4%

6.0

5.3

4.8

8.8

13.3

Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

Source: Cazenove Capital, ARC. The Cazenove Capital performance numbers are in GBP and net of fees including an annual management fee of 0.8%, trading commissions and underlying fund fees.

Of course, all investor journeys are different. Factors such as time horizon, income requirements and attitude to risk will all play a role in portfolio outcomes. Cazenove Capital will adopt the strategy that best suits your clients’ particular requirements. We use our significant investment resources, alongside those of our parent-company Schroders, to ensure that portfolios are well positioned in the context of the opportunities and pitfalls in global markets.

“What’s past is prologue”

The combination of the pandemic and the invasion of Ukraine has created a very different set of economic and market conditions from what we might have expected just a few years ago. Soaring inflation has forced central banks to raise interest rates to the highest level in well over a decade. As Schroders Chief Economist puts it, this is a “regime shift” for markets that have grown used to very low inflation and interest rates at close to zero (and in negative territory in the Eurozone and Japan).

These changes in markets aren’t taking place in isolation. They also reflect big shifts in geopolitics, politics and broader social trends. After a tumultuous few years, we think it is an opportune time to revisit our longer-term outlook. We have identified four key themes that we think will have an important bearing on markets over the next decade.

four-themes-graphic

1. A new world order

The global order that has been in place since the end of the Cold War is coming to an end. As the former Chief of the UK Defence Staff told us in a recent client webinar, “this is a much more competitive and confrontational world than we've seen in a generation. What we've seen in Ukraine may not be the last of this sort of thing that we see in the next decade.”

Recent years have shown that geopolitics can have very significant implications for investors – even if they have minimal direct exposure to the countries in question. The invasion of Ukraine fuelled the surge in inflation we saw in 2022, while the disruption it caused to energy supplies is still a major headwind for Europe. Further afield, tensions between the US and China are also likely to have a significant economic impact. Further trade restrictions and tariffs could add to inflationary pressure. And businesses have rightly concluded that they need to focus on supply chain resilience and reliability - not just cost. This was already leading to supply chains becoming more regional, and less global before Covid-19 accelerated the process.

Companies are talking about reshoring – a lot

Analysis of US companies’ earnings reports

10-reshoring

Source: As at 31 December 2022. Source: Sentieo, Schroders Investment Insights Unit. 607159

The reasons for this more adversarial world order are complex. America’s reduced appetite to act as a global policeman and take on costly international commitments is part of it. At the same time, China increasingly wants to assert its influence on the international stage. Geopolitical tensions can also be attributed to the fact that the benefits of globalisation were so unevenly shared. This has resulted in a shift towards protectionist and in some cases even nationalist, politics in both developed and emerging markets.

This changing world order could result in both higher inflation and higher volatility over the remainder of the 2020s. This will have a bearing on portfolio construction. While remaining focused on clients’ longer-term objectives, we will actively manage portfolios to take advantage of tactical opportunities. It is also likely to mean that alternative investments, which can help to shield portfolios in periods of volatility, will continue to play an important role. The changed environment is opening up new thematic opportunities as well. We look at some of these below.

2. Energy security and energy transition

Russia’s invasion of Ukraine in early 2022, and the subsequent disruption to global energy supplies, highlighted many nations’ reliance on Russian oil and gas. While a warmer-than-average winter in the northern hemisphere has reduced demand for natural gas and helped mitigate the immediate economic impacts, the security of energy supply chains remains firmly in the spotlight, accelerating the transition towards greater use of renewable energy sources.

Governments are investing significantly to both secure domestic energy supplies and reduce emissions associated with their energy systems. To take just one example, the US Inflation Reduction Act of 2022 earmarked over $300 billion to incentivize clean energy generation and transport electrification. This will unlock even greater levels of investment from the corporate sector. Companies that are facilitating the energy transition stand to benefit, while those that can’t or won’t adapt could be at a relative disadvantage.

Energy is an important part of the investment industry’s increased focus on environmental and social impact. We know these topics can be divisive. However, irrespective of personal preferences, regulation, policy and consumer demand all mean that companies and investors have to take these factors into account.

We have the analytical tools that will help us remain at the forefront of assessing environmental and social impact and the associated investment risks. This analysis is conducted across sectors and industries, including those that are often thought of as most sustainable. For example, our recent research into supply chains revealed that the solar industry is still highly dependent on raw materials from China’s Xinjiang Uighur Autonomous Region where there is a high risk of forced labour. Legislation on this issue could well impact profitability for companies in the industry. It’s a clear example of how research into environmental and social themes can help protect financial returns.

3. Technological disruption

25 years ago, the thought of downloading music or TV programmes, having your bank in your phone or storing data in “the cloud” would have seemed improbable to even the most open-minded.

There could be even greater changes ahead. Robots and artificial intelligence (AI) are likely to displace machines and humans in many areas of activity, further changing the way we live and work. Few new technologies have generated the excitement of ChatGPT, which has helped us all understand what AI may be capable of. Technology created some incredible investment opportunities in the past decade; we expect this will be the case again in the next.

Cloud computing is one theme we are focused on in the near term. Many businesses have already transitioned storage away from physical servers and onto the cloud. The trend has further to run as companies increasingly favour the benefit of cloud-based services.

Automation is another area of focus as companies localise supply chains. Rather than hiring expensive local workers, companies will look to automate more of their operations. There is significant divergence in levels of adoption to date. Robotics has grown strongly in Asia and Australia and we may be about to see a catch-up in Europe and the US. Likewise, some sectors, such as auto manufacturing, have been major adopters while others, like agriculture, have lagged.

4. Private Assets

In 2021, private equity firms spent almost £30 billion taking UK companies private* – almost twice the £17 billion raised in UK IPOs.** The figures highlight a trend that can be observed across developed markets: a shift in activity and capital towards private markets.

This is one reason why we think that private assets merit a larger role in portfolios in the future. The opportunity set has grown significantly in recent years and investors who exclude private assets altogether increasingly risk missing out. There is also significant evidence to suggest that private assets can generate higher returns and help smooth portfolio returns – both of which will be important in a more volatile environment.

Private equity and other illiquid strategies, such as private credit and infrastructure, are not new. But what has changed is the breadth and depth of investment opportunity in these asset classes and innovative new means of accessing them. This allows us to offer private assets, in an appropriate form, to most clients.

Within private equity, we have a preference for funds focused on smaller companies. We believe that they have more “levers” they can work with to increase the value of companies that they invest in. We also like secondary funds, which buy investments in existing funds. They were able to capitalize on market stress in 2022 to buy fund interests at very attractive valuations.

Our final area of focus is venture capital. The sharp falls seen in 2022 are likely to have created opportunities for skilled managers to identify and invest in transformational businesses at better entry levels. It's worth bearing in mind that some of the best-performing venture funds were raised after the dot-com bubble burst just over 20 years ago.

The next ten years

Since the start of the 2020s, the world has faced two big shocks: Covid and the invasion of Ukraine. In different ways, each has accelerated trends that were already underway and feed into the themes outlined above. They will bring significant opportunities for investors, but also challenges.

We are ideally positioned to help clients navigate this rapidly evolving environment. Our investment process has been well and truly tested by the events of the past few years and we are proud of its performance. In both 2020 and 2022, we acted quickly to shield portfolios from the worst of the market falls while successfully positioning for the subsequent rebounds. We combine an active, pragmatic approach to investment with the high level of service that you have come to expect from Cazenove Capital. This combination provides a very stable foundation for your clients’ investments over the next decade.

 

* https://www.bdo.co.uk/en-gb/news/2022/value-of-uk-take-private-deals-jumps-seven-fold-to-29-3bn

** https://www.hl.co.uk/news/articles/the-uk-ipo-market-what-investors-need-to-know

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Authors

Simon Cooper
Head of DFM
Christopher Lewis
Head of Investment Strategy, Wealth Management

Topics

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.