Where to invest as the 3D reset kicks in
How geopolitical trends influence offshore investment decisions, Pedro van Gaalen
The global economy is improving, which is good news for local investors seeking returns amid a subdued domestic growth outlook due to persistent load-shedding and logistics challenges, and uncertainty surrounding the election.
Another factor prompting a greater focus on offshore investments is the shrinking JSE following a spate of delistings and mergers or buyouts by global companies. Boosting offshore exposure gives investors access to a wider opportunity set across asset classes, sectors and growth themes to diversify portfolios and realise investment growth.
However, global risks remain, which offshore investors must consider, especially with almost half the world’s population heading to the polls in 2024.
“In an increasingly geopolitically divided world, outcomes are uncertain and risks are heightened,” says Duncan Artus, chief investment officer at Allan Gray.
Inflation is another concern investors must consider alongside geopolitical and social tensions when constructing diversified portfolios, Artus says.
“Central banks may not cut interest rates as quickly as discounted by markets in a bid to manage sticky global inflation. With worrying headlines potentially dominating the news flow, investors should guard against making rash decisions driven by emotion.”
When allocating assets, Andreea Grob, head of Türkiye, Israel, Greece and Africa at UBS Wealth Management, identifies multiple potential trends influencing offshore investment decisions.
“Liquidity management is an important theme as we expect interest rates will fall in 2024, which means cash will progressively deliver lower returns, creating a risk for investors who do not lock in returns today.”
Grob adds that investors should also prepare for a potential broadening of the equity market rally, which could materialise with a combination of interest rate cuts by the US Federal Reserve, still robust growth and falling inflation.
“We expect US and European small caps, select Swiss mid-caps and
emerging- and frontier-market equities to emerge as particular beneficiaries in this scenario, given their interest rate sensitivity and low valuations.”
Positioning portfolios for the AI boom and a stronger than expected global economy are additional focus areas for investors, says Grob.
“The AI revolution is here, which means future investment performance will rest heavily on an investor’s level of technology sector exposure. We expect rapid earnings growth and think that the big will get bigger, and believe investors cannot afford to underinvest in this trend.”
However, investors must consider concentration risk and overexposure, cautions Grob, who suggests adopting strategies that capture market upside while protecting against any downside by leveraging prevailing low equity market volatility and high bond yields.
“Structured and diversified solutions can help investors grow exposure while mitigating downside risks.”
Grob identifies various diversification opportunities for investors managing portfolio downside risks more generally.
“Investors can mitigate portfolio downside risks by adding exposure to gold and oil, which could rally in the event of geopolitical turmoil, and macro hedge funds, which have historically delivered consistent performance in times of bond market turbulence.”
Beyond the technology theme, Kondi Nkosi, country head at Schroders South Africa, believes the “3D reset” presents three trends in the form of decarbonisation, demographics and deglobalisation that will continue to have an impact on the global economy.
“As countries accelerate their response to climate change, we find ourselves transitioning from a reliance on fossil fuels to greener energy sources through decarbonisation,” says Nkosi. “This energy transition will be expensive and drive inflationary tendencies, particularly given the investment needed to bring innovation to scale.”
In terms of changing demographics, Nkosi says a predicted slowdown in global population growth will affect inflation and economic growth as employers face pressure to compete for a tighter talent pool and maximise the efficiency of their existing workforce.
“Companies will also invest in productivityboosting technology to protect profit margins, likely hastening the more widespread adoption of robotics and AI.”
Lastly, the pandemic and rising geopolitical tensions have ushered in a new era where greater supply chain resilience and security are priorities.
“Deglobalisation may continue encouraging greater near-shoring in key sectors such as manufacturing, which could, in turn, have implications across a wide range of sectors and asset classes.”
Nkosi suggests that the combined effect of the 3D reset is reshaping the investment landscape.
“Deciphering what comes next and where the opportunities lie could depend on understanding how they affect the global economy, what that means for market volatility, and how active investors allocate assets.”