2022 has been an especially challenging investing environment, with the typical 60:40 client portfolio posting some of the worst returns experienced in decades. With inflation at levels not seen since the 1970s, rising rates, Europe in recession and the US likely to follow shortly, I believe there is more uncertainty and volatility in the public markets to come, with the risks I feel being very much to the downside.
My principal concern is inflation: I just don’t think we are ‘done’, especially given how long Western governments have been printing money. We may have seen the peak of input cost-push inflation, but the demand for higher wages during a ‘cost of living crisis’ is not widely contemplated in recent inflation forecasts. This is likely to make recessions globally deeper than anticipated and the dislocations we see in markets today are likely to intensify, before they eventually normalise with wholesale asset repricings.
Responding to the challenges will require investors to engage in a ‘(re)-balancing act’, with potential conflict between maintaining a defensive portfolio positioning and making targeted investments in secular trends that will lead a subsequent market recovery past the expected trough.
I think this tumultuous environment will cause investors to rethink portfolio construction and look to medium and long-term opportunities. Private markets is one means of accessing these.
First, private markets are much broader than public markets meaning that the depth of available opportunities are therefore greater. Second, it can be clearly demonstrated that allocating to markets at times of recession and public market private volatility leads to the some of the best investment returns that private markets have to offer. Finally, as committed capital is spent by private markets managers more gradually and is locked up for a period of time, it increases the ability of those managers to exploit market dislocations and select the best potential growth opportunities.
Our (re)balancing act is therefore intended to rotate portfolios towards longer-dated investments driving real CPI-linked yields, as well as exploiting the depth of alternative credit markets during times of volatility, where senior secured asset backed refinancing packages can yield high mid-teen returns.
Four key developments
We are looking to pivot towards longer-dated investments, specifically concentrated on the fundamental secular trends we believe will be driving growth, we have identified four key stand-out secular developments that are crucial in this repositioning:
The Maturing Digital Consumer’
The coming of age of e-commerce and its impact on technology, logistics and infrastructure.
‘The Corporate Technology Revolution’
The barbarians at the gate: how business digitalisation is unleashing disruptive forces.
‘Healthcare Everywhere & for all’
The ageing population & the era of mental wellbeing
‘The Path to Sustainability’
Deglobalisation and the ‘re-localisation’ of energy generation and manufacturing.
See through the volatility – remain focused on the drivers of the macro investment environment like income generation and inflation protection. Hedge short-term volatility and risks to the downside by rebalancing portfolios towards longer dated private market investments focusing on the secular themes anticipated to power the market recovery in late 2023/early 2024. Benefit from the opportunity of the repricing of assets across sectors in the next 24-36 months. This is an optimal entry point for private market investors.
Alexis Weber, Founder and CIO of PM Alpha