SMART PORTFOLIOS IN THE NEW GLOBAL ECONOMY

The word “unprecedented” comes to mind as the most overused word since 2008. Moving on, we have witnessed “unprecedented” years of unconventional monetary policy, the western world moving toward protectionism (and away from globalisation), the sudden rise of big spending Trump-nomics, the further rise of the leveraged, volatile but inevitable emergence of China as the second superpower, and the disruptive, life-changing impact of the “Digital Revolution”.

All of these have two things in common: the world as we know it has changed. This change is collectively creating winners and losers in the world of investments. These changes represent opportunities for the few that plan properly, and risks for those that are too afraid to think outside the box - those without a proper investment guidance and plan.

In this article and our Thought Leadership series, we introduce some of the major themes that we think may drive the global economy and investment returns over the coming 10-20 years. In this series, we show why these themes mean that the financial dynasties created during this time will come not only from the financial markets, but also through following three critical elements of investing in the new world economy.

History tells us that wealth could shift more in this revolutionary dynamic within the global economy than at any time since the Industrial Revolution. Investing through a collision and combination of the three trends above is likely to help underpin value creation than continuing to follow the same investment strategies as before hoping for a different result (a sign of insanity according to Einstein).

The 1800s, the century that shaped the Industrial Revolution, also defined the rise of some of the wealthiest family dynasties in modern history: the Rockefellers; the Astors; the Carnegies; the Vanderbilts. In each case, the patriarch of these families looked beyond the day to day noise of the markets of their time and invested in what they saw as the intuitive, inevitable winners of the industrial revolution: steel, finance, urban development, infrastructure and energy. They were followed by a number of Asian entrepreneurs that were early investors during the massive shift of manufacturing jobs to Asia and eventually the rise of the digital revolution: the Lee family (consumer electronics); Ambani family (telecommunications); Kwok family (construction), to name a few.

These families had the foresight to invest in these themes against the mainstream investment trends of the time. Mistakes, no doubt would have been made, but the opportunities they had at that inflection point shaping the global economy were unique. They recognised this inflection point and did something about it. Their families have benefited for more than 100 years since as a result.

The world is far more complicated today, but the trends are no less staring us in the face any more than before. We need the same bravery and intuitive thinking as the dynasties of the yesteryears. There will no doubt be a small number of industries that will define and shape the dynasty families and companies of the future, repeating history’s favouritism toward those that invest ahead of the curve, not with it.

“We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before. We do not yet know just how it will unfold, but one thing is clear: the response to it must be integrated and comprehensive, involving all stakeholders of the global polity, from the public and private sectors to academia and civil society.

The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production. Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.” Klaus Schwab - Founder and Executive Chairman, World Economic Forum

The economic transformation is colliding with an array of extreme economic conditions, including the worst global economic conditions since the 1930s. Now a wave of protectionist politics and movement threatens to dramatically slow the shift toward a single global economy. These dramatic changes we have seen to the global economy and to wealth since then are just the beginning. Yet since 2009, financial markets’ analysts and the media have failed to see that a change has already occurred and that the world will not be returning to “long term averages”. Every single year the Wall Street consensus forecast for earnings growth was too high; the forecast for revenues growth was too high; the forecast for global economic growth was too high; and the forecast for bond yields was too high. Relying on a flip of a coin could have produced better results!

The reason for this persistent error is that markets keep expecting the global economy to return to a “normal” it knows and is comfortable with, where normal means achieving averages of those prior to the GFC. There are plenty of rational reasons to conclude that that old economy will not return but we continue to hope – hope however, is not a strategy.

Market prices are defined by the masses, by the crowd - and if the crowd is rushing to the same conclusion, helped no doubt by the array of brokers, analysts, financial advisors, going in the other direction takes belief, conviction and guidance. What with the evidence now heavily pointing toward a new world economy, the answer has to be: Do not follow the crowd; trust your intuition, and ensure you select the wealth advisory team that fundamentally shares your foresight and investment principles and strategy and is willing and able to think outside the box.

The world is far more complicated today, but the trends are no less intuitive if one isn’t blinded by this ill-placed faith in a return to the old normal. There will be a small number of industries that will define the wealthy families and companies of the future repeating history’s favouritism toward those that invest ahead of the curve, not with it. Years of unconventional monetary policy have left the developed world’s equity markets locked into a long-term cycle of very low returns. Ultra-low interest rates have pushed equity market prices so high despite no clear line of sight on how the earnings will increase.

This simply isn’t enough for most investors, whether they be pension funds or individuals. which is why the leading edge of the investment community and family offices have increased the proportion of their equities that they hold in unlisted equities, and in particular started to reduce their equities exposure, despite the recent increase in US equities.

THE NEW WORLD ECONOMY AND WHY A PORTFOLIO COMPRISING HIGH CONVICTION PUBLIC AND PRIVATE EQUITY INVESTING ALONG WITH REAL ASSETS IS CRITICAL TO SUCCESS BUILDING A SMART PORTFOLIO

The timeless principles of investing govern that one should establish and build a smart, well diversified portfolio of assets that have very little or even zero co-relationship with other assets within the portfolio. While focussing on execution-only equities’ trading made sense in the recent past, the terms of the new normal dictate the establishment and ongoing management of a Smart Portfolio of assets. A Smart Portfolio doesn’t mean following the crowd, as that will result in market average returns which, as we will show later in our thought leadership series, is likely to be mediocre in the coming years. A Smart Portfolio doesn’t mean putting everything into 2-3 investments either, no matter how good they seem at the time. A Smart Portfolio means being aware of the real economic and social themes that will shape tomorrow’s global economy and investing accordingly.

Being aware itself requires access to insight and access to companies like Crossinvest, where the focus always is on establishing be-spoked Smart Portfolios. The section below outlines our view of the new world economy from an investor’s perspective.

We are of the view that six major economic themes are likely to drive the new world economy over the coming 20 years, and therefore define the next generation of family dynasties if they are ahead of the curve:

1. Low demand could continue to mean low economic growth, despite massive monetary policy stimulus;

2. The huge debt positions that have been built up leave little flexibility to stimulate an economy, creating unpopular fiscal austerity;

3. Protectionist movement as the middle classes of the western world respond to this austerity and low employment prospects by voting ‘no’ to global trade agreements and immigration;

4. The inevitable populist politics that follows protectionist governments may favour fiscal stimulus such as tax cuts and infrastructure spending, creating inflationary pressures;

5. The volatility and pain for financial markets that lies ahead as the world attempts to withdraw from cheap leverage; and

6. The dramatic effects of the digital revolution, changing lives, destroying entire industries, and creating wealth for those that invest in the disrupters.

Crossinvest will be addressing these trends, their impact and how investors should ready themselves for this new revolution in our forthcoming Crossinvest Thought Leadership series. These articles and the coming Crossinvest research into alternative investment themes such as world energy markets, social impact investing, and sustainable agriculture are the first of Crossinvest’s series of investment insights for sophisticated investors looking to step up their insight into how the world’s leading investors are positioning themselves in this new world economy, and how Crossinvest can partner with them to deliver this value creation.

WE, AT CROSSINVEST DO NOT FOLLOW THE CROWD. WE WANT TO LEAD

The low returns forecasted for the traditional equities and bond portfolios aren’t enough to meet the ambitions of most investors. And the low returns are surely not enough to compensate for the heightened volatility that exists in today’s equity and bond markets. While there needs to be a continued allocation to conviction led traditional assets, we believe this is not all there is on offer. The wealth management industry has been lazy and we have failed to do the basic work required to stay ahead of financial markets and to prepare clients’ portfolios for the volatile changes over the past decade.

The obsession with equities in particular has resulted in client portfolios being heavily exposed to shocks such as the GFC and still being heavily exposed today. Typically the other assets offered beyond equities and bonds are just derivatives of those markets such as long/short hedge funds and structured products, which both still invest in the same underlying markets. Most clients may still have a large allocation sitting in equities or bonds only. This is not true of the entire industry of course. Those that have invested in analysing markets beyond equities have kept their clients aware of other options and therefore protected from the full extent of the recent damage done. Assets such as infrastructure, agriculture, commodities, currencies, impact investing, ethical investing, private equity, private debt, venture capital or simply direct property, offer returns that are often better than equities but more importantly, without the correlation to the increasingly volatile ups and downs of equities.

The likes of Blackrock, Fidelity or Investec offer thought leadership in a range of investing topics, not just more of the same noise about what markets were up or down last night. There are a small number of Advisory-Led wealth management firms, such as Crossinvest, that offer high quality portfolios in Asia, but it is too easy for them to be shouted down by the global investment banks and their equities-centric rhetoric.

At CrossInvest, we plan to use our independence and versatility to change all that, and become a beacon for those looking for something different….leadership in the private wealth space in Asia is lacking, we aim to fill that void.

DISCLAIMER

Certain statements contained within the information in this Crossinvest Thought Leadership white paper, may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of Crossinvest (Asia) Pte Ltd, which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Opinions expressed are present opinions only and are subject to change without further notice. No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Crossinvest (Asia) Pte Ltd shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information.