Focusing on long-term structural impact on economies more prevalent in post-pandemic investments
Schroders believes investors should cast their eyes on the long-term structure trends that are impacting global economies while balancing out short-term risks, when assessing their investment positions for the second half of 2021.
Whilst latest concern around coronavirus variants complicates the cyclical picture, Schroders continues to take a constructive view and believes sound macro and corporate earnings growth in 2021 and 2022 would be able to absorb the impact from potential rising interest rates on markets, and that the acute inflation spike could be short lived.
Keiko Kondo, Deputy Head of Multi-Asset Investments, Asia, Schroders, said:
“If central banks are to raise interest rates, we believe this would be due to uptick in economic activities which may in fact be positive for equity markets. And whilst rising inflation is creating some noise in the market, we need to be mindful that it is because of the lower base we had last year.
“We still believe that the current inflation spike will prove to be temporary. However, we do see inflation picking up next year and the need for a tighter monetary policy from the US Federal Reserve, whereas the ECB will likely remain dovish given the more tolerant for inflation target.
“We do expect USD to play a key role in providing hedges in the portfolio context in addition to bonds. Particularly we prefer long USD vs EUR given the central bank policy divergence. We expect CNY to be range-bound with the macroprudential policies by the government.
“So all in all, we remain overweight equities and underweight bonds but we have toned down the cyclical nature of our portfolios by removing the explicit tilt to Value. We maintain our diversifying long positions which would benefit from the peak in growth momentum. The ongoing cross-current of COVID-19 inevitably complicates the cyclical picture and we remain vigilant of the risks.”
Instead of focusing on the latest headlines and indicators, Schroders believes investors should pay attention to the range of global investment themes are making real impact on economies and people’s lives, such as Innovative Transformation, Environment and Sustainability, and Cities and Lifestyles – trends that are already changing the world.
Keiko Kondo continued:
“When people talk about thematic investing, they naturally think of tech stocks which have done well; but the fundamental driver or catalyst is the pandemic where we realize lots of the themes are accelerated by our changing behaviours or patterns. While some of the themes have done very well which has driven the popularity, we think thematic investing has far more to offer.
“One thing that we have learned from the pandemic is that people can come together to identify issues, find solutions, and adapt fairly quickly to change. Innovation plays a key role in this, and we believe this should be one of the focal points in assessing investments for the long-term.
“Take 5G as an example, it enables companies to develop or adopt new applications such as environment monitoring systems that could help prevent or enable earlier preparedness for natural disasters – which has been occurring more frequently in recent years – and this presents interesting opportunities for investors.
“5G can provide a lot of implications and applications to many cutting-edge technologies that we are seeing nowadays. Nowadays we are talking about a smart city eco-system that is built upon the 5G network. This is also going to transform our daily life.
“More broadly around global efforts on carbon reduction and net zero goals, investment in renewable energy and related infrastructure is crucial. Again, from an investment perspective, we should not only think about how clean energy is produced, but also how it could be transported or stored at the point of consumption, such as cables connecting to energy grids, and battery storage.
“Just like any asset classes, historical experience with themes come with significant return divergence. While it is very possible for each theme to provide ample returns over time, short term performance can vary. We believe dynamic asset allocation across equities and bonds and diversification in themes can reduce the return volatility and make the journey smoother for investors."
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