A shifting momentum

What a difference a year makes!

In 12 months, the mood of the proverbial markets has swung from one of fear and pessimism to one of unbridled optimism. Despite my many years in this business I never cease to be surprised by how the market’s perception of the long-term volatility of corporate cashflows is completely out of kilter with reality. But I should not complain, and am not complaining, because it is this phenomenon that presents a recurring, rich seam of opportunities to be mined by patient capital.

The net result of this swing in emotion is that the S&P 500, the EuroStoxx and the MSCI emerging markets Index have all appreciated at least a third; industrial metals have almost doubled in price, while US Treasury yields have backed up 75 basis points and the US Dollar has weakened significantly¹.

Now, unsurprisingly, it is time for the market to worry about a new set of risks like whether the current inflation trends are cyclical or structural; how society is going to pay for all the stimulus of the last year; and how the world’s two largest economic powers plan to coexist.

Additionally, the pandemic has awoken in all of us a respect for how fragile our society and planet are, and how they must be protected; it has focused investors’ minds on the extremity of the economic and demographic imbalances in the West that have arisen through globalization, and on the environmental damage caused by our relentless adherence to GDP growth as a barometer of progress. Rather than being a casualty of the pandemic, sustainable investing has become more embedded than ever.

In our mid-year edition of Panorama, we take stock of the various dynamics influencing the markets today and evaluate what that means for our long-term asset return assumptions. We take a deep dive into the Asian economy and the investment opportunities arising across asset classes from the growth of China and its ever-increasing relevance to the welfare of its major Asian trading partners. Are we now in a world where the concept of investing in Emerging Markets is broken, given that Asia is becoming so investible on its own?

Then we move on to a discussion of why we believe the time is right for investors to increase their allocations to hedge funds. Hedge funds have largely been left behind in last decade’s reallocation towards alternatives, but with asset prices in aggregate so high the time is likely right to focus on alpha as a driver of return as opposed to just beta, which has been such a powerful prevailing wind for so long.

Finally, consistent with our focus on sustainable investing, we preview a white paper our data science team, QED, and Bruno Bertocci, Head of the Global Sustainable Equities team are collaborating on. In it we explore a concrete way for companies and clients to model the cost of their carbon footprint in their capital allocation and valuation frameworks. It will also provide the quantifiable basis for how we engage with companies on this topic on behalf of our investors.

I hope you find our mid-year update both informative and provocative as you navigate markets. Please don’t hesitate to contact your UBS Asset Management partner should you seek further insight.

We look forward to your continued partnership throughout the next year.