Infographic: Inescapable truths for the decade ahead
Infographic: Inescapable truths for the decade ahead
Schroders has identified a number of forces that could shape the investment landscape in the decade ahead. These represent our ‘inescapable truths’, which can help guide investors through a time of unprecedented disruption.
In a more challenging future environment, factors such as asset allocation, access to multiple sources of return, active stock selection and risk management will be critical in meeting the goals of investors in the coming years.
A confluence of factors set the scene for a slowing global economy
Decline in labour force growth, largely a result of declining fertility rates
Productivity growth low but improving, we believe emerging markets can offer greater potential for gains
Greater life expectancy to pressure government finances and temper recovery in productivity
China’s global influence will increase, but it faces a decisive transition period
Inflation pressure will be limited by slower spending, an ageing population and levels of debt
Interest rates expected to remain low by standards of pre-crisis levels
Disruption will come from a number of angles
End of Quantitative Easing (QE): Other central banks likely to follow US lead to reduce assets on balance sheets. This could increase supply of government and corporate bonds to the private sector.
Changing patterns of finance: Banks will play a reduced role in financing economic activity. Corporate bond market expected to expand, along with private equity and alternatives (e.g. peer-to-peer lending, crowdfunding).
Changing business models: Technology has a tendency of disrupting existing businesses which creates winners and losers. Picking those on the right side of technological progress will be key for portfolio performance.
Greater labour market displacement: Rise of robotics and AI will impact a wider range of professions. This may worsen problems of inequality which can bring greater political disruption.
Rapid action needed: There are growing tensions between the real economy and natural environment – particularly climate change. While inaction implies significant long-term risks, steps to avoid the worst of climate change will also prove disruptive. Find out which sustainability issues matter to investors.
Financial squeeze: The economic outlook will undermine government finances, while aging populations will increase pension spending and demand for healthcare.
Pressure on individuals will grow: Government challenges will mean people will need to take greater individual responsibility for funding their retirement and healthcare.
Rising populism: Populism has been fuelled by stagnating living standards for most of the population. Policies to temper the impact of globalisation through restrictions on trade, immigration and capital flows are likely to emerge.
1.As interest rates normalise and QE unwinds, we think there will be greater focus on profitability and earnings growth as drivers of growth. Market volatility will also be high.
2.There will be greater divergences across asset classes and within markets, and absolute levels of returns for stocks and bonds will likely be lower than in recent past. Nevertheless, our research shows that the typical investor is expecting annual average returns of 10.2% over the next five years.
3.The result of this is that there will be greater need for active fund managers who can generate alpha i.e. beat the market in the decade to come.
In summary, after almost a decade of strong returns many investors have become complacent about the outlook. This assessment suggests that in a more challenging future environment factors such as asset allocation, access to multiple sources of return, active stock selection and risk management will be critical in meeting the goals of investors over the next decade.
As we enter the next phase of the post-global financial crisis era, these inescapable truths can help guide investors through a time of unprecedented disruption.
Please click on the link below to download the full report as a PDF:
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The views and opinions contained herein are those of the Authors, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested.
Schroders has expressed its own views in this document and these may change (to be used if the 1st statement above is not being used).
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The forecasts stated in the document are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.