To kick off a new decade, PLANADVISER decided to speak with investment managers about the long-term themes they see dominating the markets for the 2020s. While they generally see great opportunities, they also see significant challenges.
Notably, some of these conversations took place immediately prior to the significant bout of negative market volatility that has occurred globally based on concerns about the viral disease COVID-19. In that respect, however, the long-term focus of the commentary offers some important context for investors watching the daily market headlines.
Lower Assumed Domestic Returns
Most notably, “for domestic investors, there will be much lower returns,” says Crit Thomas, global market strategist for Touchstone Investments. “We have had 10 years of very strong returns, resulting in high multiples on U.S. stock valuations. While the strong returns have been very much driven by earnings, much came from margin expansion. At this cycle peak, we cannot deliver that going forward.”
Erik Knutzen, co-head of multi-asset at Neuberger Berman, agrees with this premise, saying, “over the next 10 years, returns from traditional betas—stocks, bonds, inflation-sensitive liquid markets, as well as commodities and TIPS [Treasury Inflation-Protected Securities]—will be much lower, lower than long-term averages. This is due to our projections for economic growth, inflation and interest rates, based on current valuations and elevated debt levels for governments and corporate borrowers. All of this will lead to lower expected returns.”
So far, 2020 has proven this outlook to be correct, but not necessarily for the economic reasons cited above. For the week that ended February 28, the Dow Jones Industrial Average plummeted more than 12% on fears about a worldwide coronavirus outbreak. Unfortunately, this kind of volatility could persist for the foreseeable future, says Craig Stapleton, senior vice president and portfolio manager at Securian Asset Management.
Stapleton says the economy and the markets could continue to grow in the foreseeable future—but that with the high levels of debt that exist among many countries, “the coronavirus could be the tipping point that leads to geopolitical unrest.”
The Impact of ‘Deglobalization’
Another theme that investment managers foresee for the markets in the coming decade is what Thomas calls “deglobalization.”
“After 20 years of globalization, countries are starting to pull these pieces apart,” he says.
Jon Adams, senior investment strategist at BMO, agrees that we may be on the cusp of “the potential end of globalization.”
“While it fueled the economy over the past few decades, trade has now peaked, and we are starting to see more skepticism that globalization is good for everyone,” Adams says. “The U.S. and European countries are looking more inward.”
Echoing this theme, Knutzen believes that “the current distinction between emerging and developing markets 10 years from now will not be in place. This will lead investors to use different frameworks. Perhaps they will invest without regard for regions, and we expect this will be true for equities, fixed income and product markets.”
Another blurring-of-the-lines that Neuberger Berman expects will occur in the next decade is between private and public markets. “A decade from now, we will not make such a distinction between public and private markets,” Knutzen says.
Amid Challenges, the Upside Remains Strong
In addition to all these wholesale changes, Nancy Prial, co-CEO and senior portfolio manager at Essex Investment Management, foresees tremendous investment opportunities in the years ahead, driven by technological developments yet to be seen.
“We are in the middle of an extraordinary innovation cycle in the U.S. and around the world, in three major areas,” Prial says. “One is in the development of 5G data. There will be the use of big data everywhere, along with algorithms and artificial intelligence. This will drive increases in productivity and the development of computers and technology in ways no one can expect. The movement will be akin to the Industrial Revolution at the beginning of the 20th century.”
The second big area of development that Prial foresees is advancements in health care. “Not only may we witness the promise of the cure for many cancers and extraordinary developments in the treatment of coronary disease, but scientists could develop ways, through the genetic modification of cells, to slow the process of aging to add 20 to 30 years to people’s lives.”
The third massive area for opportunities for investors that Essex Investment Management expects is the invention of solutions to stem climate change, particularly in the use of solar, wind and electric energy solutions, Prial says.
These three areas will boost the markets over the next five to 15 years, she maintains. “While it won’t be in a straight line—there will be bubbles—overall, the trend will be up,” Prial says. “As growth investors, we will be able to capitalize on these developments.”
Finally, and in line with Prial’s third point, investment managers expect environmental, social and governance (ESG) investing to become mainstream.
“I do believe that ESG will become a bigger and bigger deal for investors,” Thomas says. For instance, he notes, the water levels of the Great Lakes are incredibly high. “In the 1960s, we would have interpreted that as a result of flooding. Today, we interpret that as a climate-related event. Events like this will continue to push the ESG story along, prompting people to put more money in investments that are friendly to the environment.”
As Knutzen puts it, “ESG will become table stakes.”