Equities and fixed income set to endure

To build a future on more sustainable terms, the world is confronting new realities on climate change and old truths on how speculation hurts

The original version of this article first appeared in The Business Times.

From personal experience, it now takes about 3 hours to clear immigration lines at Los Angeles. Over in Zurich, there were likewise long lines snaking through the airport as travellers escaped borders to visit Switzerland after years of being trapped in the same, unchanged scenes from wherever was home. Tourists should be prepared for more expensive shopping too, judging by lofty prices I saw on display. 

That on-the-ground data tells me that revenge travel is working through the system, as consumers unleash their pent-up demand for travel. This vacation vengeance is a reason that global inflation has remained stubbornly high. Consumers have been saving in the last few years amid Covid-driven restrictions, and are now unleashing some of their spending power. Liquidity is moving from the financial markets where people were trading meme stocks and cryptos with their government cheques and hoarded savings, to spending on experiences they can cherish as memories.

It’s why airfares and prices of hotel stays are going through the roof. Infrastructure and labour are both in short supply as there’s just not enough people back at work in airports and hotels, and on planes. Labour shortages abound just like housing was in short supply during the past few years, driving real estate prices higher.

This is all happening during one of sharpest corrections in financial markets since the pandemic began. The markets are mirroring the sharp drops seen when the pandemic first broke, and during the early part of the Global Financial Crisis. 

It is too soon to say whether the future ahead is more like the rebound in 2020, or if we will see a similar downturn as in 2008. But some related thoughts came to mind as I attended the inaugural Point Zero forum in Zurich — an event co-organised by Singapore and Switzerland. The forum was a platform to discuss some of the hottest topics in finance: Web 3.0 and sustainable finance. They remain divisive topics. Proponents hope to use them as means to improve the status quo, but detractors still find fault in the design, implementation, and the opportunities that are put forth by developments in these two areas.

Still a future in ESG investments

Traditional assets such as stocks and bonds are falling in value as investors fret over a hard landing triggered by the Fed’s efforts to rein in that stubborn inflation. But what’s worthwhile noting amid this is that ESG-related sectors or investments have fallen more than that of heavily polluting commodities and energy sectors. 

ESG sustainable investing has been one of the losers in the downturn, as its exposure to long-term growth markets and companies has led to a weaker performance. 

Despite this, the focus on quality companies still makes sense from both an investing and consumption point of view. Would you like to use a product or service from a company that is on your side as a consumer, using the best raw materials and ingredients that is safe and healthy? Would you prefer to buy from a company that takes care of its employees, and works in good partnership with its supply chain while taking care of its environment including factories or shops? I certainly would, and investing in ESG or sustainable areas is simply about picking these types of companies that will not only last, but also thrive over the long term. 

Amundi, the largest European asset manager, published a recent survey with The Business Times that found nearly 8 out of 10 people surveyed were profiled as “engaged” ESG investors, demonstrating strong interest and commitment to environmental and social causes on a daily basis, and in their investment decisions. This figure is significantly higher among those of the Gen Z (93 per cent) and young millennials (82 per cent).

It suggests that sustainable investments are here to stay, in spite of the current downturn. In the current cycle, ESG-related investments are posting losses after putting up some stellar return numbers over the past several years. These are admittedly the areas where there seems to have been much froth. Taking froth off the top is a good thing, and why market cycles exist. When things get frothy, the markets take a downturn and when things get cheap and value emerges, the market bounces back.

Crypto’s all-season winter

The crypto winter is a separate story. While it is hard to say where markets will be headed next, what’s clearer is that investors are giving a thumbs-down to investments that have no solid backing of long-term value creation. It seems crypto and meme stocks, as well as tech stocks with no growth and no earnings, are the common targets now. Anything that lacks sustainable growth is being questioned. Even though we have seen a stunning plunge in crypto values, it is impossible to have a strong conviction that crypto is now cheap to “hodl”. There is no intrinsic value to “liquid gold” as some people still endearingly call Bitcoin, compared with physical gold. This so-called value, in fact, could easily evaporate. 

It’s also worth noting that cryptos showed high correlation to equities and traditional financial markets, further weakening their case as a financial asset that offers diversification benefits. 

As for financial markets, we are at a stage where a lot of the known unknowns and known knowns among the negative outlooks have been largely priced in. These include unprecedented levels of volatility and uncertainty arising from secular and cyclical trends, as well as from the ongoing war.

After a slump of more than 20 per cent in equity markets and an unprecedented fall in fixed income markets, these traditional financial assets have been hit with a bad rap. In particular, fixed income investors have been bruised, with many claiming the death of the 60:40 balanced portfolio yet again. This time, there is some credence, as we have rarely seen an extended period like in recent months where equities and fixed income have moved downwards, in tandem. At first blush, it would suggest that fixed income has not been a good diversifier of risk and therefore, that the balanced portfolio is not doing its job.

Still, the unprecedented nature of the declines today is a testament to the unique nature of the recent cycle. The financial markets have been roiled by unprecedented generational shifts in the force of price movements involving a global pandemic, a war, and aggressive rate hikes after years of investing in a low-rate environment.

To add, fixed income markets have been surprisingly efficient at pricing in a lot of the negative expectations of where interest rates are headed. Yields have moved well above 3 per cent for 2-year and 10-year Treasuries, pretty much where the consensus expects the Fed Funds rate cap currently at 1.75 per cent to be at the year-end. With negatives priced in from interest rate hikes, the worst of the fixed income market may be behind us. Just like in 2020 and 2009, the fixed income market is expected to be more resilient than other asset classes on the downside. It may be the first to rebound, as it has shown some signs of doing so in recent weeks. 

More importantly, the lessons from recent travels amid a market downturn tell me that some of that hype from the touted next-best things is clearing up. Traditional financial assets such as equities and fixed income are set to endure. 

Despite the many uncertainties and unpredictable future we face, the next cycle will prove the resilience of tried-and-tested models of investing again. For the old truths remain: Passive investing beats out active trading, diversification through well-constructed portfolios is still the best way forward, and costs — like our travel shopping — will come to bite if we don’t read the price tag with care. 

After all, we may hanker for a change of scene, but in the end, we all come home to the things that stick around and that stand the test of time.

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