This article is a summary adapted from a panel discussion with Raphael Arndt, CEO of Future Fund; Greg Jensen, Co-CIO of Bridgewater Associates; Anne Richards, CEO of Fidelity International; and Lei Zhang, Founder and Chairman of Hillhouse, at GIC Insights 2022, which was held on 15 November 2022 in Singapore.

Moderated by Jeffrey Jaensubhakij, GIC’s Group Chief Investment Officer, the conversation looked at the increasing impact policy changes have on markets and what investors can do to build resilient portfolios. The speakers also discussed the economic outlook for different regions and how the world can tackle the climate crisis through greater cooperation.

When policymakers influence markets

The current volatile global economy is characterised by persistent inflation, continued policy tightening, rising geopolitical fragmentation and an unprecedented energy, and climate crisis. In the midst of this, the panellists pointed out that the role of policymakers had risen to the fore, with long-term investors and forward-looking corporations having to increasingly navigate an economy overwhelmingly influenced by policy rather than free markets.

They noted that this might be the first time in a long time that policymakers have played such a central role in driving macroeconomic direction, evidenced in actions like the Federal Reserve’s monetary tightening policies. They predicted that government intervention in the economy could be more common and more intrusive – regulating businesses, compressing margins, influencing trade, and changing tax mixes.

Even so, the speakers remarked that as a result of continued elevated inflation, policymakers might still face significant constraints in implementing either monetary or fiscal policy to combat an impending global recession – one that could hit next year, according to a recent World Bank study. They also noted that central banks faced increased difficulty as their inflation models had shown poor predictive power amidst the volatility.

Many predict that we are headed for – or are already in the midst of – a global economic downturn. How long do you estimate a potential recession to last?

Source: GIC Insights 2022 audience poll

On the timing of markets’ reactions to the impending recession, there were differing views among the panel. Some noted that as the markets had not priced in a possible recession with persistent inflationary pressures, further market volatility may still come, and could lead to a longer, deeper downturn. However, others said that inflation expectations could start to come down in the second half of 2023, leaving more potential for an upside surprise, especially in Asian markets where central banks are not as behind the curve.

Despite the gloomy outlook, the panel agreed that investment opportunities were still available. These included real yields from inflation-indexed bonds, private markets, as well as in countries that could benefit as companies seek to diversify their manufacturing from China.

Think resilient portfolio, not assets

When discussing resilience, the speakers thought it was important to build resilient portfolios of assets, rather than focusing on particular assets that one might label “resilient”. They stated that investors would know, for instance, that bonds and cash are resilient in a business cycle recession while gold and commodities help to manage downside risk in an inflationary recession.

Is the 60/40 portfolio dead?

Source: GIC Insights 2022 audience poll

The panellists discussed alternative ways that investors could shore up their portfolio. These included using skill-based strategies and geographical diversification. They also said that stock-picking skills and operational value-creation capabilities had become more valuable as global macro trends had become less supportive of aggregate asset class returns.

When looking at companies to invest in, the speakers highlighted adaptiveness, strong fundamentals, and being within sectors that provided value creation and high growth opportunities. They noted that such companies were able to quickly respond to the rapidly changing environment and have leveraged technology to develop innovative solutions which could help push down costs and buffer against top-down macroeconomic difficulties.

Ahead of 2023, the panel cautioned against thinking markets would follow the macro environment. Some pointed out that markets tended to anticipate and move ahead of the economy, a possibility that investors should bear in mind as they execute their strategies.

A tale of two continents

The panel also discussed the contrasting economic outlooks of Europe and Asia over the next six to 12 months. With war at Europe’s doorstep and its direct consequences, particularly on energy and food prices, the speakers reflected that there seemed to be a real sense of fear among policymakers of the income effect on wide swathes of the population. They reflected that the expectation for the continent to suffer a difficult recession in 2023, combined with other secular and cyclical factors, might also result in populist policies.

To avoid the full brunt of a downturn, the panellists stressed that cooperation within the European continent would be vital. They pointed out that the Russia-Ukrainian war had already precipitated some of this, and that relations between the United Kingdom and Europe had also showed signs of warming, with some movement to reduce frictions on trade underway. Even then, the panel recognised that Europe’s political situation remained volatile, with policymakers potentially reacting to the war and the changing economic situation in a diversity of ways, which would contribute to increasing unpredictability from an investor’s standpoint.

Meanwhile, Asia presented a far more optimistic picture for investors. The panellists noted that Asian markets would likely recover from an impending recession sooner than their European counterparts. Fund managers are already making a beeline for places like Southeast Asia, as the region’s stability and growth prospects make it far more attractive. From manufacturing solar-powered batteries to exporting nickel, Asia remains a bright spot.

On China, while the panellists recognised that investors would have to remain careful, undertake extensive bottom-up due diligence, and even opt for more liquid investments, they concurred that it should remain a part of any investor’s portfolio. The key would be to understand the politics and what the Chinese government’s policy stances mean. They said that it was now clear, based on the latest Party Congress, that the country would be pursuing “modernisation with Chinese characteristics”. This approach, they explained, emulates specific government policies from other countries, such as housing or education, but tailors them for China. It also potentially opens up opportunities in investing in the green economy and social sectors.

Businesses need more policy signalling to reach sustainable goals

One thing the panellists agreed on was how climate change would be a significant factor when it comes to investor demand. They highlighted that even as corporations must continue to step up their sustainability commitments, governments needed to also send stronger policy signals on the demand side – be it policies that promote the use of solar panels in buildings or which make it easier to own an electric vehicle.

The panellists agreed that by now, businesses and governments recognised the cost of failing to meet their 2050 climate targets and agreed that the consequences would be vast. Increasingly, sustainability has become embedded within organisations, a move that panellists applauded, even while they warned that corporations should be wary to not become complacent about their integration efforts. More debated, according to the panel, was the trajectory to getting to key climate goals within the next 30 years. Critical factors of consideration should include energy security, in addition to the diversity of economies and countries that transition pathways would have to be tailored to.

Beyond cooperation between governments and businesses, the panellists also emphasised the need for greater collaboration among businesses themselves. Within an incrementally fragmented global supply chain, the panel pointed out that companies would do well to collaborate to facilitate the energy transition needed to manage climate risks.

Even as these challenges are posed to businesses and policymakers, the panel acknowledged that significant investment opportunities remained, particularly in Asia and in climate-related solutions – a bright spot for investors in what may be a volatile 2023.