What investors need to know in the 21st century

February 06, 2020 15:34
Investors will need to use fundamental research and stay active as they seek to separate the winners from the losers, says the author. Photo: Reuters

In the last two decades, the global economy experienced major transformations. Below are some of the top stories from the start of the 21st century – and what investors can learn from them:

1. Central-bank support first saved the global economy, but then encouraged bad behavior.

What changed in the last 20 years? Central banks steered the global economy through periods of major upheaval – the dot-com bubble, the financial crisis, the euro-zone crisis – by driving down interest rates and pumping greater levels of stimulus into the financial system.

Central banks have maintained this “loose” monetary policy even though economic growth has re-emerged, albeit at a low and slow level. But maybe of more concern, policymakers haven’t been able to create enough inflation globally even though prices have soared for equities, real estate and other asset classes. The markets are now all but “addicted” to central-bank support.

What could the future hold? Central bankers feel they have no choice but to keep rates ultra-low or even negative, even though this doesn’t leave them much room for maneuver when the next recession or crisis hits. They may need to resort to more unconventional tools, such as adjusting their inflation targets or underwriting large increases in government spending. Moreover, politicians still need to fix the underlying structural issues in economies, including low productivity growth, businesses making bad investment choices and steadily rising overall debt levels.

Why does it matter for investors? Too much monetary stimulus can jeopardize financial stability.

When rates are low, risk-taking and debt levels rise, which can cause credit and asset bubbles. And when the economy eventually slows down, companies struggle to maintain their debt burdens and run for cash – which raises the risk of defaults, lowers investment and can even reduce employment.

If central banks can’t fix some of the economy’s deeper problems, governments may resort to fiscal stimulus in the form of increased spending or tax cuts. Central banks may be pressured to finance these initiatives by buying up more debt, raising the specter of sovereign default if governments are unable to fulfill their obligations.

2. Disruptive tech survived the dot-com bubble.

What changed in the last 20 years? The 1990s dot-com boom went bust in 2000 when investors saw that high stock valuations weren’t backed up by profits. But the tech sector survived, and it’s prospering today. Mobile computing, e-commerce, cloud computing and social media have transformed how people work and live, and Big Tech companies have become some of the largest corporations in the world.

What could the future hold? Big Tech firms may become even more powerful unless governments rein in their excesses. Advances in artificial intelligence and robotics could transform entire industries, underscoring the need to evolve our educational system to support a high-tech workforce.

New technologies could expand the “sharing economy” (car sharing, holiday rentals, etc.) but also grow the “gig economy” as people increasingly turn to online platforms to find employment. As more people work on a day-to-day or project-to-project basis with fewer benefits and job protections, we could see inequality increase further.

Why does it matter to investors? There are many ways in which high-tech disruptors could be disrupted: investors could discover that some firms have spurious valuations, and governments could cramp their business models with new regulations and new “digital taxes” on e-commerce revenues. Investors will need to use fundamental research and stay active as they seek to separate the winners from the losers.

3. Sustainable investing has reached a tipping point.

What changed in the last 20 years? Sustainable investing has evolved from a trend into an important part of how portfolios should be managed. Investing sustainably means incorporating non-financial inputs – such as environmental, social and governance (ESG) factors – to seek to generate sustainable outcomes as well as strong financial returns.

What’s behind this shift? Climate change has been a major motivating factor, but sustainability is broader than that. For example, companies that address issues such as executive pay can help improve their competitive positions over the long term.

What could the future hold? We expect to see voters pressure governments to find real solutions to climate change. We also want to see shareholders and boards encourage management teams to operate their businesses in a more sustainable way. Asset managers will likely continue to drive capital towards sustainable companies and projects that address what investors view as some of the world’s biggest challenges.

Why does it matter to investors? Investors are seeing proof that sustainable investing can help them manage risk and improve return potential, and we believe that interest in this area will continue to grow.

There are many ways to make sustainable investing a core part of an investment approach: incorporate ESG risk factors into decision-making; focus on sustainable and responsible investing (SRI); align with the UN Sustainable Development Goals; or invest for impact by using capital to address real-world issues.

Perhaps investors can help jump-start a new “climate race” that results in ground-breaking, productivity-boosting innovations – similar to how LEDs and solar cells came out of the 1960s “space race”.

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As Global Strategist at Allianz Global Investors, Neil Dwane is responsible for presenting strategic house views and overseeing the Economics and Strategy Research teams.