Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
Prepare for ‘unfamiliar terrain’ says PIMCO
“Investors should prepare to navigate unfamiliar terrain as the macro-economic landscape undergoes dramatic transformations over the secular horizon,” is the message from global asset manager PIMCO. But what exactly is PIMCO saying?
At this year’s annual “Secular Forum,” PIMCO’s global investment professionals focused on the post-pandemic outlook for the global economy, touching-on themes such as policy, politics and financial markets in the next five years. The team’s findings drew a rather gloomy picture for the global economy, one riddled with higher volatility, divergent growth and rising inflation.
PIMCO says the “decade of sub-par-but-stable growth, below-target inflation, subdued volatility, and juicy asset returns is rapidly fading in the rear-view mirror. What lies ahead is a more uncertain and uneven growth and inflation environment, with plenty of pitfalls for policymakers.”
But it’s not all doom and gloom: PIMCO says the light at the end of the tunnel is three broad trends that are likely to drive a major transformation of the global economy and markets. A transformation driven by disruption is where investors can really outperform.
The investment giant sees three trends that should drive major secular transformations: the transition to ‘green’ energy, the faster adoption of new technologies, and an increasing tendency to “share gains more widely.”
And developments over the past year have reinforced these broad trends.
PIMCO found that “digitalization and automation have been turbo-charged by the pandemic. Extreme weather conditions in many parts of the world have also inflicted severe human and economic losses and contributed to major gyrations in energy markets.”
The fast adoption of digitisation and automation can only lead to higher efficiency and greater output, giving better economic outcomes overall; at the same time, creating new jobs and making existing jobs more productive.
But PIMCO warns that “a world of disruption and divergence will present more difficult terrain for investors than the experience of the ‘new normal’ over the past decade.” But it will also provide investors with the opportunity for outperformance, “especially for active investors who are equipped to take advantage of what we expect to be a period of higher volatility and ‘fatter tails’ than the common bell curve distribution.”
Low cash rates will continue to anchor global fixed-income markets, which means that bonds should continue to provide investors with diversification, while returns are subdued. “US Treasury inflation-protected securities (TIPS), as well as commodities and other real assets, make sense to help hedge against inflation risks,” the firm suggests.
“Amid disruption, division, and divergence, overall capital market returns will likely be lower and more volatile. But active investors capable of navigating the difficult terrain should find good alpha opportunities,” says PIMCO.
The team concludes by highlighting themes such as semi-conductors, factory automation, green energy and mobility supplies as being ones that stand to benefit from secular trends; and to “take advantage of the illiquidity premium by pursuing opportunities in private credit, real estate, and selected developing capital markets.”
