Techtonics - Tech, markets and regime change
Expert: Alexander Chartres, Investment Director at Ruffer
Facilitator: Dave Edwards, Founder, Esperto Business Solutions
Key takeaways:
- Period of low interest rates and market volatility to continue
- Technology innovation and growth has historically been associated with deflation
- Technology stocks are being impacted by COVID with slowdown in economic growth
- Technology stocks experiencing period of high volatility
- High profile tech stocks e.g. FANGS remain dominant in world markets
- There will be a shift towards more disruptive and new technologies – next tech bubble
- Use of conventional bonds in portfolio construction is challenged
- Transition away from 60/40 traditional asset allocation models
- Move towards more flexible asset allocation models.
Context:
Fast-growth tech stocks have dominated markets in recent years and technological disruption is itself contributing to regime change for financial markets.
The new regime will require different investment strategies to those previously worked well and there will be winners and losers in the new era, including fast growth tech stocks.
Technology and innovation have helped to keep the world disinflationary through automation and efficiency. The productivity gains from technology have already been harvested in a low inflation/low interest rate world.
However, the increase in subscription-based services delivered through technology has had the opposite effect on inflation. These companies are seeing increased valuations on future revenue and valuations.
There has also been an increasing number of loss-making tech companies floated in recent years. Technology dominates our lives and the headlines and investment portfolios.
Investment strategy
The existing regime of low interest rates and low inflation is likely to change during recovery post COVID and the expectation is that although it will not last indefinitely it is likely to be more than just a few more months.
Inflation is expected to be higher, and we need to adjust portfolios to reflect this change. It is expected that Inflation will increase in short term, but investors should not make knee jerk re-action.
Inflation will spike and then come back down. The shortage of raw materials e.g. timber is USA, computer chips in China will also drive inflation. Building short- and medium-term plans with assumptions of 2% inflation 2% growth rates may prove prudent.
However, this approach may prove to be less relevant in long term planning.
The ratio between net return and inflation will come under pressure as equity returns start to fall based on levels of debt. JPMorgan forecasting that equity returns will be much lower in 2021-22.
Consumer expectation on return will continue to be high so the difference between interest rates and inflation will be a critical measure.
The popular asset allocation strategies of 60/40 stock/bond portfolio with conventional bonds look very vulnerable so what are clients and advisers planning to do differently?
Why are people still in conventional bonds, is it a natural part of the retirement planning process? The whole investment universe looks dangerous now, and there may be a need to look elsewhere for offsets, like inflation linked bonds.
The primary job of bonds is to dampen down the volatility so that clients can stick with the plan through thick and thin. Investors are going to need to abandon government and corporate bonds, because they offer very low expected returns and limiting.
The equity bond correlation has been negative, in other words, when equities go down bonds have gone up that is only because inflation has been low. We are going must find a new meaning to the word balanced portfolio.
So, what constitutes a genuinely diversified balanced portfolio in the next few years?
Value is going to out perform growth, and that is hard to reconcile because it has been poor returns for more than a decade.
In addition, the rate of the pace of tech change is so fast that you have now got all these new disruptors coming in all the time. Where are the growth opportunities?
The 60/40 equity bond portfolio may just flip as we see the returns of bonds increase and equities stall.
To deliver growth in equities you may have to look at alternative’s tech stock and increased diversification in the bond market.
In summary will 40/60 Equity/Bond mix be the new games in town.
