Fake or fortune: are things really as they seem for global investors?

A shrinking global workforce and renewed geopolitical divisions present challenges for portfolio managers, but investments in technology and climate change will define which players are successful.

In today’s world it can be hard to distinguish between genuine opportunity and illusion. Children of the 1970s were promised a future of lunar mining colonies, ubiquitous hovercraft and free energy from nuclear fusion. At that point, nobody mentioned indispensable — for which, read addictive — hand-held devices with 100,000 times the processing power of the computers that ran the Apollo missions.

We can all get caught up in the received wisdom of the time, wisdom usually based on two expectations. The first is the comforting notion that the future will likely resemble the past. The second is that the most eye-catching technology and headline-grabbing preoccupations of the present will inevitably dominate how we live in the future.

Global transition

Today we live in a period of global transition, where the future is arguably much less likely to resemble the past — a knock-on effect of which is that the old certainties of investment may no longer apply.

The Covid-19 pandemic and the unwinding of seemingly never-ending supportive monetary policies have effectively ripped up the economic rulebook. What comes next is not expected to be a return to the ‘normality’ we became accustomed to in the decades that followed the 2008 global financial crisis.

Instead, we are entering a new regime in which inflation is likely to be higher and interest rates more volatile. The effects of climate change may become increasingly central to our lives, together with the ramifications of ageing populations, the productivity challenges posed by a shrinking global workforce and geopolitical divisions that could lead to conflict. Meanwhile, the rate of technological progress is accelerating, widening the range of our potential ‘futures’ and making it more likely that disruptive forces have a major impact.

While we anticipate positive asset returns, they may be somewhat lower and more volatile than investors predict. In our view, this environment should favour an active, forward-looking investment stance. It should also benefit a more traditional approach to asset allocation that focuses on maximising diversification and targeting risk-adjusted (rather than absolute) returns and carefully considers structural and tactical portfolio tilts.

Investors and artificial intelligence

The current investment landscape is complex, and one in which the ability to look deeper and distinguish real from perceived value is paramount. One area where there is a real and present need to look deeper is the remarkable performance of technology companies associated with artificial intelligence.

The valuations of these companies suggest a long, steep runway of growth, but the truth is that investors and AI users alike are still at a very early stage of figuring out what AI can do for them. There are, and will continue to be, companies that do very well from AI, and we aim to participate in their success. These include providers of cloud services, makers of semiconductors and networking hardware, and owners of large, useful datasets.

But there is a distinct possibility that, for many, AI will not be their saviour. Rather, it could become an additional cost of doing business and keeping up with their peers — a cost that many companies may struggle to pass on to their customers.

While companies could find new technology tipping the balance in their favour, sustaining that advantage is a different matter. What really matters in the long run are more traditional considerations, such as market structure, barriers to entry, competitiveness, unique competencies, strategies and the quality of a company’s management.

Fixing food

Living in an increasingly tech-dependent society, it is easy to forget we are still at the mercy of more elemental forces, such as food supplies and the weather, both of which are undergoing significant transitions.

Many people hope the high food prices caused by the pandemic’s dislocation of supply chains and the war in Ukraine will somehow return to ‘normal’ levels. Our research indicates, however, that elevated levels of inflation will be an enduring feature of the global food system, partly because of today’s more divided and fractious world and higher labour costs. More fundamentally, however, the heat stress, flooding and higher sea temperatures that accompany climate change will pose increasing risks to the food system.

The production and consumption of food is complex, touching many different aspects of the natural environment and human society. Finding solutions that address supply pressures, changes in consumer preferences and the challenges of climate change will open up a wide range of investment sub-themes that we expect to continue for many years to come.

Net zero’s silver lining

Climate change is another area where we believe markets are severely underestimating the investment potential. In our view, the shift to lower carbon economies could result in the largest wave of capital investment yet seen in human history.

Clearly, how we source and use energy must change, but we must also invest significant capital in all areas of the global economy, from clean transport to sustainable buildings, agriculture to materials and digital technology.

According to estimates by the Intergovernmental Panel on Climate Change and others, we must increase annual climate-related spending by several orders of magnitude if we are to keep global warming to below 2C. While projections vary, the IPCC and the Global Landscape of Climate Finance (2021) predict that we will need to reach annual climate spending of $6tn by 2040, and to continue to invest at this level.

Today’s investment environment makes it difficult to distinguish between real opportunities and mirages that dominate the horizon. Viewing the world through a thematic lens helps correct this, enabling us to see connections, risks and opportunities that may not be apparent when focusing on specific sectors or geographical regions.

At the same time, we are conscious of the need for flexibility in order to capitalise on emerging opportunities and respond to deviations from long-term trends. Having a diverse roster of investment themes at our disposal gives us this scope, and has served us well since launching our first thematic portfolio back in 1994.

Yes, 2023 was a year of market curve balls. Moreover, 2024 may have more in store — such as the possibility of a second Trump presidency, which could have implications for individual portfolio holdings and even for global asset allocation decisions.

Melanie Roberts, head of charities at Sarasin & Partners