There are many words to describe financial markets in 2020, but “normal” certainly is not one of them. Equity markets the world over were rattled by the imminent slowdown in global growth, culminating in the fastest bear market on record in March, only to recoup losses (and then some) just a few months later. In the realm of fixed income, liquidity issues were front and center at the peak of the crisis, forcing governments to step in and guarantee liquidity in order to reassure investors, but low rates still plague those seeking safe sources of income. The commodity market wasn’t spared – for the first time in history, oil buyers were being paid to take on product after benchmark prices for WTI crude plunged to negative $37 a barrel. The “new normal”, it would seem, is anything but.
Yet while these traditional asset classes stole headlines, equally interesting were the investments that didn’t spend much time under the spotlight: infrastructure; agriculture; private debt; real estate; and private equity. These non traditional assets flew under the radar, but for all the right reasons; as the market panicked and volatility set in, these asset classes performed as expected, generally experiencing relatively minor volatility while generating positive income. In short, they brought stability to a volatile and uncertain world.
If we had to describe 2020 in a few words, it would be “wake up call.” Equity investors have been enjoying one of the longest bull runs on record with few bouts of volatility. However, in 2020, investors were reminded that volatility and market drawdowns are not a matter of if, but when. Similarly, bondholders have witnessed the seemingly endless decrease in rates over the last few years. But those seeking safe sources of income are now attuned to the fact that government yields nearing 0% won’t be able to meet their needs for the foreseeable future thanks to Jerome Powell saying that he’s “not even thinking about thinking of raising rates.”
Looking forward, the investing landscape has changed meaningfully, with important implications for portfolio positioning and the construction of a well-balanced portfolio. While we believe that the worst of the COVID-induced crisis is indeed behind us, the subsequent output gap stemming from the economic stop in early 2020 will allow central banks to pursue extremely stimulative monetary policies for an extended time. This implies that interest rates will remain pinned lower or longer than historically would have been the case in order to close that gap between actual and potential growth, which may inevitably spark a stronger, more profound period of economic strength and corresponding upside in inflation expectations without the fear of premature monetary policy tightening. Indeed, in an important secular shift, central bankers will assume a more relaxed stance towards higher inflation and a willingness to let the economy run hot in order to make up for a decade of below-target inflation, creating a lucrative backdrop for both the economy and investors alike. Both the Federal Reserve and the Bank of Canada have already reiterated that rates will remain on hold near zero for “at least” the next three years.
We believe that the end result will be a new cycle of strong and above-trend growth that will likely follow for the next several years, with the ultra-accommodative impulse from major central banks ultimately nurturing the economic recovery and extending the visibility of the cycle. This reflationary backdrop bodes well for equities, commodities, and other inflation-linked “real” assets (such as infrastructure, real estate, agriculture) at the expense of traditional core fixed income asset classes. It is likely that equities make new highs over this time horizon, while the low starting point for interest rates has reduced the return proposition for traditional fixed income strategies going forward.
As traditional core fixed income strategies are unlikely to play the same role of providing stability and income generation in the portfolio setting, the inclusion of non-traditional income strategies should be considered due to their solid income-generating capabilities, their ability to protect against inflation, and their low correlation to traditional asset classes. We believe that optimizing a portfolio to include non-traditional income strategies will help to improve the risk-reward proposition for investors over the next five years.
Our “new normal” thus requires an expanded set of investment opportunities, and the natural evolution for those seeking stability, income and the potential for capital gains is a pivot towards alternative assets. So for those seeking to diversify and solidify their portfolios by adding non-traditional strategies, what can we realistically expect from them going forward? Relying on years of experience, Fiera Capital’s private alternative investment teams have worked together to provide insight on how the coming year may play out for their respective asset classes. Below, we synthesize their expertise and discuss what factors will likely affect alternative assets in 2021, a year that is likely to once again be unprecedented, extraordinary, uncertain and yet, promising.
- Infrastructure Outlook
- Real Estate Outlook
- Agriculture Outlook
- Private Debt Outlook
- Private Equity Outlook