Opportunities in a challenging investment landscape
Let me conclude with a brief description of the shifts or transitions we are experiencing in the current investment landscape. Transitions involve moving from an old to a new state. We are not witnessing a change from the last 10 years going into the next decade, but a shift that will perhaps define the next 50 years versus what we experienced in the last five decades. This is a significant change. During such transitions, we often see a high level of volatility and uncertainty.
Now, as the saying goes, a lot of these changes often happen slowly and then suddenly. It is an accumulation of issues over a long period of time. We are now in the “sudden state” and are seeing large market and economic moves. Within this uncertain world, making policy is very difficult. We are already witnessing some delays and failures on the part of policymakers in the last one to two years. I am afraid that some of these accidents might continue to happen.
Now, before you despair and become bearish, I would also highlight that oftentimes in financial markets, especially for long-term investors, market sell-offs are the seeds of future recovery. Let me give two examples.
There is some restoration of value in the fixed income market. A specific example I like to cite is what is a measure of risk-free rate, the US 10-year Treasury Inflation-Protected Securities (TIPS). The real yield beginning of this year for the 10-year TIPS was -1.2%. If you had bought that bond, you would have basically guaranteed to deliver -1.2% real return for the next 10 years. It is terrible because you are depleting the purchasing power of your fund. But today, it is +1.3%. Now you can tell your clients that you can almost guarantee a minimum additional purchasing power of at least 1.3% per year for the next 10 years. If you go longer, if you plan for a 20-year time horizon, it could be higher.
That is not a whole lot of real return. But the risk is also very low. This phenomenon of higher asset yields is taking place across many asset classes. I believe we will work through all these market difficulties. In fact, for long-term investors, it is the asset yields which matter more compared to capital gains and losses because of long-term compounding.
The second possible opportunity is in the area of transition finance, to tackle climate change, for example, which is going to cost economies a lot of money, while also providing investors with many opportunities.
It is not going to be easy, because you have dilemmas and trade-offs to manage. You have three things that you are trying to achieve: affordability, security and sustainability. Typically, you can only hit two of the three. If you want affordability and security, you sacrifice sustainability. If you want affordability and sustainability, you sacrifice security. Investors have a great role to play in trying to reduce the trade-offs and minimise the downside.
Low-carbon technologies are one area that we have invested in, including green hydrogen, renewables and carbon capture and storage. The cost curves of renewables have come down a lot, so that is an area that family offices can consider participating in.