D-cipher video series: The impact of 3D Reset on financial markets in 2024
In our first D-cipher video of 2024, we discuss the impact of the 3D Reset on financial markets. We discuss key considerations investors should consider in light of the long-term impact of deglobalization, decarbonization and demographics.
Key considerations for investors to consider in light of the 3D Reset:
Decarbonization is continuing to accelerate, and investing in the energy transition presents a huge opportunity. The energy transition requires significant investment, with conventional energy capital expenditure at $500 billion per year and energy transition investment around $100 trillion between now and 2050.
However, the current investment falls short of what's needed for the desired energy transition. With recent market fluctuations, valuations across energy investments are now more attractive.
The role of fixed income
The 3D Reset and changing market dynamics call for re-evaluation of fixed income in portfolios. The traditional approach of buying beta and relying on price appreciation may no longer be sufficient.
As central banks withdraw, liquidity and interest rates normalize, fixed income markets are expected to experience increased volatility. This emphasizes the importance of dynamic approaches and more differentiated strategies.
In this new interest rate environment, investors could benefit from differentiated income through securitized and opportunistic strategies. These strategies can offer diversification, uncorrelated income, and the potential for stable cash flows and returns.
The changing fixed income landscape also has implications for retirement income strategies, requiring a re-assessment of traditional approaches like target date retirement funds.
Rethink the re-up – private markets
We believe the backdrop for private equity performance has evolved. Leveraged returns are harder to find due to higher rates and excess capital and large buyouts. However, transformational growth opportunities may exist in the lower middle market. Smaller, less efficient businesses around the world offer specialized investors attractive entry multiples and the potential for significant returns through operational expertise.
We believe private equity investors should go global, think small and seek specialized investors in this new regime.