Five themes for a low interest rate world
Five themes for a low interest rate world
Forecast returns are based on the average performance of different asset classes over very long periods of time. As an active manager, our job is to identify investments that will perform better than average.
Opportunity one: bigger government
Fiscal spending has been an important part of governments’ response to the pandemic. However, even before Covid-19, policy-makers increasingly recognized that monetary stimulus alone could not be relied on to boost economic growth. One problem is that it has been a big driver of increasing inequality. Booming financial markets mean the wealthy have become wealthier, while incomes for lower earners stagnated.
A health crisis which fell more heavily on the shoulders of the less well-off reminded politicians that this is not sustainable. Joe Biden went so far as to reject an economic principle that has influenced US policy-making for decades: “trickle-down economics has never worked,” he told a joint session of Congress in April. In the UK, Boris Johnson’s calls for higher spending to help the country “level up” continue to attract support.
One way investors can benefit is through companies exposed to infrastructure spending. Biden is currently trying to win support for a $2.3 trillion infrastructure plan, focused on transportation, water infrastructure and access to broadband. This will add to a growing list of infrastructure projects around the world, boosting growth prospects for companies in a range of sectors.
Opportunity two: the energy transition and sustainability
Some of this infrastructure spending will make its way into projects that facilitate the transition to renewable energy. Around a third of the EU’s €750 billion European Recovery Fund, for instance, is to be spent directly on “Green Deal” objectives.
The opportunities are huge – and 2020 was the year when many investors realized it. This has left valuations of some popular climate change investments at levels that are hard to justify – and not every climate change investment will deliver attractive returns. The solar sector, for instance, has proved particularly difficult. However, there are many companies that are still reasonably valued and well-positioned to benefit for the shift: they could be set for many years of above-average growth.
Renewables set to become the primary source of energy
Global energy source by decade
Source: BNEF, Schroders, Climate Action Tracker, Ninety One – 31 October 2020
Our expertise in sustainable investment is helping us navigate an increased focus on social and environmental impact. We have the tools to help us understand companies’ stakeholder relationships and the implications of climate change for their future profitability. We believe this this will be essential as markets increasingly value companies on the basis of their “impact-adjusted profits.” It should also help us avoid the drag of carbon-intensive industries, potentially boosting returns.
Opportunity three: healthcare & technology
The healthcare sector needed significant investment to adapt to ageing populations even before Covid-19. The pandemic has made this more pressing. “Just as the banking sector had to increase buffers against risk after the global financial crisis more than a decade ago, the health sector will be expected to do the same after the pandemic,” observed Schroders’ Chief Economist Keith Wade last year. We expect to see higher levels of investment in healthcare systems, benefiting a broad range of service and equipment providers. Pharmaceuticals also look well-positioned. While the discovery of a vaccine may not have been a financial windfall, it is further evidence that the sector is starting to reap the rewards of years of investment in research and development.
Technology has been benefiting from long-term structural tailwinds for several years – and many of these trends were accelerated by the pandemic. While last year’s revenue boost for some “stay-at-home” stocks may fade, the fallout of the pandemic should continue to support corporate technology spending. Companies are likely to continue transitioning their IT to cloud computing, in part to allow for more flexible working arrangements. Manufacturing companies are also likely to continue enhancing the resilience of their supply chains, with further automation a major factor.
Opportunity four: China
Years of significant investment in research and development means many Chinese companies are emerging as leaders in areas previously mentioned – such as technology and renewable energy.
One structural aspect of China’s equity markets that we particularly like is the fact that, despite its huge size, it is less “efficient” than more established markets. Individual investors still account for a high proportion of trading volumes and as a result share prices often trade well below – or above – their fair value. This creates fertile hunting ground for active managers.
China’s fixed income market is also appealing. It’s government bonds offer a higher yield than their Western counterparts, while offering similar defensive characteristics.
Opportunity five: private assets
For investors who can lock-up a portion of their capital for the longer term, private assets – investments not listed on a public market –offer a useful tool to improve returns and allow us to benefit from some of the most significant capital market trends of the past few years.
For a variety of reasons, many successful companies are remaining private for much longer than has traditionally been the case. Private equity allows us to tap into these pools of innovation that may not be accessible in public markets. Private debt markets allow us to take advantage of another trend: the rise of alternative lenders who have increasingly replaced banks and bond markets as a source of financing.
More traditional areas of the private equity market – such as large buyouts – also stand to benefit from continued access to low-cost financing. While some earlier investors in this space gained unwelcome reputations, the industry has matured and become more aware of its obligations towards all stakeholders.
Managing wealth in an era of low interest rates
Markets are worried about the return of inflation and, in turn, higher interest rates. Unlike some, we believe low rates will remain a defining feature of markets in the years ahead. This has important implications when it comes to investing your wealth.
This article is issued by Cazenove Capital which is part of the Schroder 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.