Alternative investments key in low-growth environment
Weakening global economic conditions will suppress returns from equities and fixed income heading into 2020, making it more important than ever that investors consider alternative asset classes, according to Aberdeen Standard Investments.
The global asset manager’s senior global economist, James McCann, said the next few years would likely be characterised by low growth, weak inflation and continuing low interest rates, making it difficult for traditional asset classes to generate returns up to their long-term averages.
“We expect investment returns from traditional assets to be much lower than in the past,” Mr McCann said.
“A significant amount of government bonds are already yielding negative. The late stage of the business cycle and the lack of room for corporate margin expansion suggest that equity returns will be below their long-term average.
“The classic rotation from equities to government bonds and investment grade credit will no longer be appropriate in this cycle.”
Mr McCann encouraged investors to look at alternative asset classes that were less correlated to movements in the global economy and traditional markets to boost returns in their portfolio in the coming year and beyond.
“For investors who are able to bear illiquidity risk, private market assets, which are uncorrelated with equity volatility, such as private equity, private debt, infrastructure and real estate offer diversification benefits to portfolios and significantly higher return potential than public markets,” he said.
“We particularly favour infrastructure; the combination of relatively high yields and economically insensitive cash flows makes it a very attractive diversifier.”
He added that opportunities around renewables and ethical investing more broadly were also attractive for investors with a longer-term time horizons, as an increasing amount of global capital would need to be devoted to these industries in coming years.
“The longer-term opportunities lie in ESG, low-carbon energy transition and technological disruptions — tackling climate change requires massive transformation in energy use across the power, industrial, transportation, real estate and farm sectors,” Mr McCann said.
“Meeting the Paris Agreement’s goals requires doubling annual global investment in renewables to over $700 billion. This is why ESG considerations must be at the heart of all investment strategies.”