The FINANCIAL — Institutional investors should consider include the ‘white waters’ of the late cycle; winds of change in market participation; tectonic frictions in the global world order; and increased focus on sustainable investing, according to Mercer’s findings.
Chance of ‘White Water’ turbulence
The macroeconomic backdrop continues to be positive; pro-business policies and levels of business optimism continue to assist the equity market in the near term However, there is mounting evidence of overextension of credit. Outstanding debt is increasing, while quality is decreasing.
Covenants are deteriorating and speculative use of debt is becoming more evident.
When these contrasting equity and bond market currents meet, there is scope for ‘white water’ turbulence. Navigating such an environment will require investors to be alert, prepared and tenacious.
Winds of change in market participation: Central banks retrench from market involvement
As central banks now try to rein in their market involvement, it is far from clear what the implications for liquidity will be, and the increased involvement of institutional investors in private markets affects both public and private investors.
A rise in the number of investment strategies that sit between traditional active management and traditional passive management is likely to benefit many investors not suited to either extreme.
Political fragmentation and trade tensions threaten globalisation
The 2018 theme of political fragmentation continues to be relevant into 2019 and is likely to be a prominent theme into the next decade. It is possible that the pace of globalisation may slow, pause or even go into reverse.
Whilst more turbulence in global politics is likely to continue to weigh on markets, it may present a more favourable investment environment for certain types of opportunistic strategies.
Increasing focus on sustainability
Governments, regulators and beneficiaries are increasingly expecting those with responsibility for allocating capital to take a broader perspective of risk and return; although there are strong regional differences in expectations
The incorporation of sustainability considerations into portfolios involves the need for a longer timeframe than that typically used for investment decision making. Investors who do take a longer term view may uncover opportunities that are not currently priced in.