24 Jul 2024
Newton multi-asset portfolio manager Simon Nichols considers three global investment themes he thinks are likely to have a positive influence on multi-asset portfolios.
Three key thematic drivers of markets and company profits – political change, government debt and power competition – are, we think, aligning to make the coming years a great time to be a mixed assets manager with a broad remit to deliver returns for clients.
Political changes
While we have been unpicking the differences between political manifestos in the UK there is similar calculus for over half of the entire world’s population this year as they too choose their future political leaders. With electorates in many countries tired of established parties’ policies, we are seeing populists gain an increasing toehold on power. As a result, it is clear many elections may change many lives. They could also be meaningful for investment in terms of fiscal and monetary policy, inflation, international trade relations and conflict or co-operation.
As a mixed assets portfolio manager, I believe it is critical to identify and understand the most important of these influences on each asset class. In the short term, the impact of most elections is highly unpredictable as manifesto promises often evaporate after polling day. We therefore think it is sensible to focus on fundamental and longer-term drivers which together matter far more. These drivers can clearly be changed by political upsets, so we aim to harness the flexibility and adaptability in our approach by identifying opportunities in the face of such uncertainty.
Around 60% of global equity markets, by value, are listed in the US1 and the US economy represents around 25% of global GDP2, so it is understandable that the presidential election has the potential for out-sized influence on portfolios. In many important aspects however, such as fiscal positions or geopolitical posture, we think the outcome in the US election is unlikely to result in major changes – though the candidates differ in areas such as immigration and energy policy. More importantly, the scale and dominance of US equity markets over recent years is the result of generous returns sustained by an era of loose monetary policy and a reassurance that authorities would likely intervene to smooth out the worst vagaries of a sharp economic cycle.
Government debt
After several years of support, the US now has an unenviable debt burden of over 121% of GDP3. Pandemic-aside this is almost double the level of the previous cyclical peak in the mid-1990s of 65%4. From where we stand, the outlook is not good, with an ageing population likely to place a compounding burden on key welfare costs that will rise far ahead of economic growth and tax revenues.
Many would argue this does not matter much because the US dollar is the dominant currency of trade and wealth globally. To date, those who want to trade with the largest consumer economy globally had little choice but to accept payment in US dollars. They then had little choice other than to invest their dollar profits in US assets (US government bonds and stocks). This is a circularity that we observe has supported the currency, market valuations and ever-increasing public debt.
Power competition
This hegemony however is increasingly under threat as other global powers take more polar political positions and back different sides in local conflicts. The huge scale and rise in the wealth of China and India’s middle classes suggest there are now other consumers for manufacturers to pursue. The emerging economies of two decades ago are now economic powerhouses and are increasingly asserting their stature as new global trading patterns emerge. While the US remains the pre-eminent global economy and leads the world in technology development, threats to its dominance are emerging thanks to the trifecta of populism, indebtedness and power competition.
Impact on mixed asset portfolios
It is tempting to see higher bond yields, combined with easing inflation as offering attractive opportunities for investors. However, higher yields can also be viewed as a renewed recognition of the future risk that investors could face as the burden of debt comes home to roost. That’s a longer-term issue and, meanwhile, at least the higher yield on bonds means there may be opportunities to use them as a tactical risk hedge without so much of a drag on returns.
In equities, the US market has become narrowly led by a few mega-cap stocks with 10 firms comprising almost 30% of the S&P 500 index5. This is largely thanks to enthusiasm for artificial intelligence which we think has the potential to be truly transformative both to existing processes and innovation possibilities. However, as always, it is important to retain perspective when constructing a mixed assets investment portfolio, maintaining exposure to transformational trends but balancing this with other exposures cognisant that these material tailwinds can fade.
As such, I think being globally diversified is important as it means not being tied to asset classes or having index constraints. Newton’s multi-dimensional research team identifies and monitors the thematic drivers that shape markets and the outlook for individual firms. With this global approach, we look across markets with the aim of identifying the best opportunities irrespective of location.
The value of investments can fall. Investors may not get back the amount invested.
1Bloomberg. April 2024.
2Worldometers.info. GDP by Country. Accessed 27 June 2024.
3Forbes.com. Understanding The National Debt. 3 January 2023
4FiscalData.treasury.gov. What is the national debt? Accessed 7 June 2024
5Benzinga.com. The ‘AI Big 10’: 10 AI Stocks Now Comprise 28% Of S&P 500, Up From 14% In 2023. 18 June 2024.