As we saw following Russia’s invasion of Ukraine, geopolitical tensions have accelerated countries' need to end their dependence on traditional energy sources, and strengthened their appetite to transition to cleaner forms of energy.
That is why the deglobalisation trends we’re seeing today are intertwined with decarbonisation trends. These are two of the Ds which make up the "3D Reset" (see: The Big Questions: What is the 3D Reset?), reshaping the global economy and markets.
So it's perhaps unsurprising that investors are responding to these two seismic trends in very similar ways, according to the Schroders Institutional Investor Study (SIIS) (see: Schroders Institutional Investor Study 2023: how investors are responding to inflation and geopolitics threat).
When asked about which asset classes will give the best medium-term investment opportunities under scenarios of deglobalisation and decarbonisation, in both cases respondents picked out equities (developed markets) and infrastructure/renewables as their top choices (see chart, below).
We also know that demographics – the third D of the 3D Reset - is a key factor in how some of the changes currently reshaping the global economy are likely to play out.
China’s Covid-19 lockdowns exposed the vulnerabilities of a globalised model of extended supply chains, compounding disruptions resulting from geopolitical tensions between the US and China pre-dating the pandemic.
But the reset of supply chains is not occurring in a vacuum – demographics are an important factor as multi-national corporations (MNCs) seek to diversify and improve the security of their supply chains.
The working age populations of the world’s largest economies are forecast to be shrinking by the end of this decade as populations age. But not all countries will be affected to the same degree.
Equities benefit from globalisation reset
Emerging markets with more favourable demographics for labour-intensive manufacturing are challenging China’s status as the “factory of the world”.
India, for instance, is an attractive market for MNCs looking to diversify their manufacturing exposure. In contrast to many countries, its working age labour pool is forecast to keep growing.
For this reason, we’re not surprised to see respondents to the SIIS also single out emerging market equities as they position for demographic trends in the medium-term (see chart below).
David Rees, Senior Emerging Markets Economist, says:
“In developed markets, opportunities may be more smart manufacturing-related, centred around the intersection of manufacturing and technology.
“By contrast, opportunities in emerging markets and Vietnam (a frontier market for equity investors) may be more labour intensive manufacturing.”
For more, see: Globalisation reset: which economies and markets stand to benefit? and
Inflation pressures to spur innovation
Major shifts in the three areas of decarbonisation, demographics and deglobalisation are expected to have significant long-term implications for the global economy. Importantly, these “3Ds” will likely result in greater medium-term inflation pressures.
Central banks are currently raising interest rates to bring inflation to heel. If they succeed, as expected, it seems very likely that the cost of doing so will be an economic slowdown, and recession in some instances.
But even once the immediate problem is addressed, inflation pressures are set to persist in the new economic regime. All of this means investors need to revise their investment strategies, if they are to manage risk and find opportunities in a changing world.
A renewed focus on private assets more broadly (which encompass infrastructure/renewables, other real assets such as real estate, as well as private equity and private lending) are another way some of the world’s largest institutions are repositioning.
Adam Farstrup, Head of Multi-asset, Americas, says:
“If we continue to see inflationary pressures long-term, investors are going to look at areas which will help solve that inflation problem.
"One of these things will be the ability to invest in technologies that will help mitigate inflation long-term, which naturally leads to private assets in addition to public markets.
“In light of the 3D Reset, we believe companies will invest in technology that increases productivity to protect profit margins, leaning more on robot and artificial intelligence use where possible.
“For investors, this could mean rich opportunities for active equity managers and private equity strategies that invest in these productivity-enabling technologies as well as businesses poised to benefit from these technologies.”
Over half of investors surveyed in SIIS (55%) agree that stricter carbon pricing will be inflationary for at least the next decade, while 61% agree that shortages of key minerals and metals needed for green technology will add to inflationary pressures.
The significance of this is that inflationary pressures are likely to remain for the medium to longer-term, rather than being a short-term phenomenon. And, as history has shown, the imperative of mitigating higher costs can spur innovation.
In this context, it is unsurprising that 67% of respondents said they believe the energy transition will drive investment in innovation, creating significant investment opportunities.
Private assets to capture innovation trends
Similarly, when asked about how deglobalisation could impact the global economy and asset allocation, almost half (49%) of respondents agreed that institutional investors will seek more exposure into private assets and alternatives in order to capture innovation in productivity-enabling technologies.
Nils Rode, CIO of Schroders Capital, says:
“Powerful long-term trends such as decarbonisation, deglobalisation, and demographics, alongside the ongoing AI revolution, will drive a markedly different economic and geopolitical environment over the next decade and beyond.
“Considering the importance of longer-term trends to many private assets investments, these themes are particularly significant. We see attractive investment opportunities in areas such as sustainability- and impact-aligned investments, renewable energy, generative AI, and investments in India”.
As the global economic outlook changes from a long period of relative stability to an era of inflationary pressures and more volatile markets investors are reassessing their strategies and allocation plans.
The importance of innovative technologies to meet future challenges supports the case for private asset investments, while investors also specifically identify infrastructure/renewables and equities as valuable assets to hold.
- For a description of some of the terms used above, see The 3D Reset: the economic terms you'll need to know