While moderate normalization represents our base case scenario, it is by no means free of big question marks: How and when will financial markets find their way back to smooth functioning, something which has been heavily disturbed by the unorthodox central bank interventions of recent years?
Against this backdrop, after a protracted period during which beta (the market) has dominated returns, we see a shift toward portfolio manager skills (alpha) playing a much greater role in generating returns. As rates go up, the pace of appreciation of equity markets slows. US equities in particular command rich valuation metrics and it is realistic to expect that over a 5 to 10 year forward view returns will be lower than those experienced over the past few years. In this phase of the cycle, every 50 basis points of alpha will be worth gold and the appetite for alpha-oriented strategies is likely to grow.