The COVID-19 pandemic has accelerated significant shifts in existing trends, and while some of these trends may fade as the public health crisis abates, others are here to stay, according to a recent report from the Mercer consulting firm.
“Continuing social and technological change has accelerated at an exciting and disconcerting pace,” Deb Clarke, global head of investment research at Mercer, said in a statement. “And COVID-19 has caused an acceleration within that acceleration.”
The report, titled “The Great Acceleration: Themes and Opportunities 2021”, identifies three key premises that Mercer believes will impact investment decisions in 2021 and beyond: “the new world”, “the activity is unusual” and “the position for the transition”.
The “new world” refers to how fiscal institutions try new techniques to ensure economic stability and continuity, as well as how global allegiances and working relationships are recast. Mercer said this could impact inflation, risk considerations and the appeal of opportunistic investment strategies.
According to the report, politics is “currently distorting the economic fabric,” as authorities experiment with monetary and fiscal stimulus in response to the pandemic. As a result, interest rates went from “lower for longer” to “lower for a very long time,” Mercer said.
“It comes at a price for the privilege of holding public assets, which have gone from risk-free return to risk-free return,” according to the report. “In these strange and interventionist times, the ‘invisible hand’ has effectively been put on leave, as the cost of capital and, therefore, the value of risky assets are now largely determined by politics.”
The report also says a “huge unanswered question” is what asset returns look like when the economy becomes so “artificial.”
Mercer said many portfolios could be more resilient if their inflation protection “goes from zero to some,” and suggests investors consider buying unexpected inflation protection before it gets too much. Dear.
“Investors who have the governance and implementation capacity to use derivatives might consider investing in a balanced inflation strategy that gives more direct exposure to changes in inflation expectations,” the report said.
Meanwhile, “business as usual” refers to trends in financial and business markets, and social movements, in which the world’s ways of life have “changed forever”.
The report notes that investors are increasingly concerned about where their money is invested and that the companies they invest in are working for a sustainable future. Last year saw strong flows into sustainable funds, Mercer said, and those flows have accelerated this year, with a stark contrast in net outflows compared to the rest of the fund market.
“In our view, investing in high ESG value strategies [environmental, social, and governance] ratings are the broadest way to improve portfolio sustainability,” the report states.
Mercer also noted that tech companies “are an invaluable part of the COVID-19 response,” providing remote work and online shopping from the safety of one’s home. However, the company said these stocks are priced somewhere between “good weather” and “perfection”, and while they may offer great potential for growth, “they carry substantial risk”.
Finally, the “position for the transition” is a “call to action” for investors to align their portfolios with a strategy that manages the risks of transitioning to a low-carbon economy and the risks of climate change.
“Investors should not be caught off guard by carbon-intensive portfolios affected by market, technological or regulatory changes,” the report says. “This means that investors must no longer wait to act and must exercise DARP, decarbonisation at the right price. “
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Tags: 2021, coronavirus, COVID-19, Deb Clarke, inflation, Mercer, pandemic, The Great Acceleration