Markets Summit 2022 - Program & Faculty
With interest rates near historical lows and asset prices around all-time highs, practitioners are grappling with the defensive side of multi-asset portfolios.
Fiscal stimulus and distortions in supply chains and labour markets arising from the Covid-19 pandemic are fuelling inflationary pressures, and policymakers are starting to wind-back their stimulus measures. Problematic inflation or deflation would pose a substantial threat to stock markets, which are arguably priced for perfection. Meanwhile, policymakers must wrestle with long-term societal and economic problems, not least that of climate change, a collective threat which must be tackled against a backdrop of elevated geopolitical tensions and increasingly mistrusted global institutions.
In team sports, offensive players typically get the glory, but it’s a robust defence that wins games. More than ever, practitioners need to ensure that the defensive side of multi-asset portfolios is match fit, if they are to meet the long-term investment objectives of clients. The best offence is a great defence!
Markets Summit will help you better understand the key drivers of and outlook for the markets, and the opportunities and risks ahead on a three- to five-year view, to aid their search for return and to help you build better quality investor portfolios.
We’d welcome you joining us - at our Live Studio in Sydney, as part of a group at an off-site Live Site, or via Live Stream. Our full hybrid model ensures the “show will go on” whatever the Covid circumstances. Register now!
Graham Rich
Dean, Portfolio Construction Forum
QUICKLINKS
More info & to register Where; When; Aim; Most suited to; CE/CPD accreditation; Cost; Theme; Register now
A quick introduction
Established in 2009, Markets Summit is THE investment markets scene setter of the year. The program is designed and curated by our specialist, experienced and independent team and features a Faculty of 20+ leading investment thinkers - geopolitical specialists, economists, market/asset class experts, and investment strategists - from around the world. Each offers his/her best high conviction ideas on the drivers of and outlook for the markets (on a three- to five-year view) in the context of the program theme “The best offence is a great defence!”
Theme: The best offence is a great defence!
With interest rates near historical lows and asset prices around all-time highs, practitioners are grappling with the defensive side of multi-asset portfolios.
Fiscal stimulus and distortions in supply chains and labour markets arising from the Covid-19 pandemic are fuelling inflationary pressures, and policymakers are starting to wind-back their stimulus measures. Problematic inflation or deflation would pose a substantial threat to stock markets, which are arguably priced for perfection. Meanwhile, policymakers must wrestle with long-term societal and economic problems, not least that of climate change, a collective threat which must be tackled against a backdrop of elevated geopolitical tensions and increasingly mistrusted global institutions.
It is said that markets most dislike uncertainty. And in 2021, investors faced an array of hard-to-quantify risks including rising inflation and the prospect of tighter monetary policy, the emergence of the highly-transmissible Omicron Covid-19 variant, and an unexpected Chinese crackdown on education, technology, and property firms. Meanwhile, increased Chinese and Russian belligerence – directed at Taiwan and Ukraine, respectively – raised the spectre of armed conflict between autocratic and democratic superpowers.
Yet markets not only climbed the wall of worry - they vaulted clean over it, as investors chose to look through the uncertainties. US Treasury yields rose during 2021 but remained largely below pre-pandemic levels, while the S&P 500 leapt 27%, with all sub-sectors posting double-digit gains. The rise capped the equity benchmark’s biggest three-year increase since the dotcom bubble period more than two decades ago. Closer to home, Australia’s ASX 200 index gained 13%, boosted by strong returns from financials.
The question is: will markets continue to accentuate the positive, in the year ahead?
Portfolio Construction Forum believes that understanding what’s driving the markets, as well as the outlook for the markets, can be usefully determined by considering the influence of three principal forces – geopolitical, economies and asset classes – across cyclical, secular and structural time horizons. Using this framework, the Covid-19 pandemic may be understood as a Black Swan geopolitical force, which is cyclical by definition and which is interacting in complex ways with economies and asset classes as well as across other shorter term cyclical, long-running secular and structural time horizons.
Markets Summit 2021 “Back to the drawing board!” explored many of these interactions, including the pandemic’s acceleration of pre-existing trends towards environmental, social and governance (ESG) investing, as well as “big government” in the developed world. Our faculty urged portfolio construction practitioners to keep a close eye on inflation and bond yields but were collectively bullish on the cyclical outlook for global stock markets.
Now, as we head into 2022, uncertainties over inflation and interest rates continue to overshadow other near-term investment risks. For the past four decades, equities were supported by a combination of benign inflation and falling yields. This easy money environment – backstopped since the Global Financial Crisis by unconventional central bank policies – rewarded risk-taking and fuelled demand for speculative investments, including unprofitable technology companies and crypto-assets. But whether such conditions will persist is hotly contested.
Many economists point to rising US wages, ongoing fiscal stimulus, and growing demand for supply chain security, as signs that the party for investors is finally ending. Further, declining birth rates will boost the bargaining power of workers longer-term, they say, supporting a shift to a higher inflation and interest rate regime. In contrast, the deflationistas argue that inflationary pressures will fade away with the pandemic, allowing powerful secular deflationary forces – including technological innovation and increased automation – to reassert themselves. Whichever side proves correct, one way or another, the implications for markets are profound.
In team sports, offensive players typically get the glory, but it’s a robust defence that wins games. The maxim is equally applicable to investment portfolio construction – particularly in an environment of historically high asset prices, low expected returns, and heightened uncertainty over the path for interest rates and inflation. More than ever, practitioners need to ensure that the defensive side of multi-asset portfolios is match fit, if they are to meet the long-term investment objectives of clients. The best offence is a great defence!
Program at a glance
Wednesday 23 February 2022
AEDT 7.45am - Live stream starts
AEDT 8.15am - Pre-opening scene-setter
AEDT 8.30am - Critical Issues Forum
The best offence is a great defence!
With interest rates near historical lows and asset prices around all-time highs, practitioners are grappling with the defensive side of multi-asset portfolios. In team sports, offensive players typically get the glory, but it’s a robust defence that wins games. More than ever, practitioners need to ensure that the defensive side of multi-asset portfolios is match fit, if they are to meet the long-term investment objectives of clients. The best offence is a great defence!
- Graham Rich, Dean, Portfolio Construction Forum (Sydney)Prep!
Read: Markets Summit 2022 “The best offence is a great defence! - scene setter”
AEDT 8.35am - Critical Issues Forum
The days of abnormal monetary policy are over
Since the Asian and Long-Term Capital Management crisis of 1998, when Federal Reserve chair Alan Greenspan rescued the markets, Wall Street has called the shots, forcing the US central bank into spectacular interventions and U-turns. Asset prices in general have been pumped full of unprecedented monetary and fiscal stimulus. With US inflation at a 40-year high, and the housing and labour markets red hot, the US Fed has finally taken a distinct and meaningful step forward on the path back to normal. Central banks around the world have begun to follow suit and we’ve now seen a volcanic eruption in short term interest rates in Europe. The game has changed. Investors need to accept that the days of abnormal monetary policy are over.
- Jonathan Pain, Author & Publisher, The Pain Report (Sydney)Prep!
Watch: JP’s Markets Summit 2021 presentation “Be optimistic, but beware – big risks lie ahead”
AEDT 9.15am - Critical Issues Forum
There are no steady states so focus on long-term change
In times of rapid change, the temptation is to grasp the familiar, seek certainty and hunker down until ‘normality’ returns. But the question should be, ‘is there such a thing as normal?’ Short-term regularities are often dominated by long-term trends, such that short-term theory is often unhelpful for navigating uncertainty. Steady states are becoming increasingly rare, the belief in ‘reversion to the mean’ is less relevant than ever and, ultimately, investors are better placed focusing on the main game – long-term change driven by the real economy and real innovation, rather than being distracted by patterns emergent in financial markets or even economic policy response.
- Robert Wilson, CFA, Investor, Baillie Gifford (Edinburgh)
AEDT 9.20am - Critical Issues Forum
Inflation volatility is the biggest challenge investors face
The correlation benefits of traditional ‘balanced’ portfolios have been central to their success in delivering strong risk-adjusted returns since the 1980s. Central banks created an environment of falling interest rates and low inflation. Bonds acted as effective offsets in falling equity markets. But the game has changed. A new market regime demands a change to the art of portfolio construction. The return of inflation volatility represents the most challenging and significant paradigm shift in decades. Portfolio construction practitioners are going to have to look much harder to find protection, as the last 20 years of optimisation gives way to resilience.
- Alex Lennard, Investment Director, Ruffer (London)
AEDT 9.25am - Critical Issues Forum
It’s time for a new investing playbook
Investing over the next several years is going to be unlike anything we’ve experienced in decades. The pandemic triggered a paradigm shift in the economy, politics, and markets that stimulated a rapid economic recovery. This recovery, however, also added fuel to the fire of inflation resulting from a surge in demand for goods whose supply was constrained. As central banks pivot from QE to QT and rate hikes to dampen price pressures, investors should re-evaluate the post-GFC era playbook that might no longer work amidst structurally higher inflation and rising discount rates. Undoubtedly, it’s time to go back to the drawing board to reassess the best approach to both defence and offence in a more volatile, changing market.
- Ronald Temple, CFA, Managing Director, Head of US Equities & Co-head of Multi-Asset Investing, Lazard Asset Management (New York)Prep!
Watch: Investors need a great defence AND offence in a high growth world
AEDT 10.05am - Morning Break
AEDT 10.25am - Critical Issues Forum
No offence: Russia is bluffing on Ukraine
Tensions between Russia and Ukraine dominate the news, amid warnings that Russia is poised to attack its south western neighbour. A large-scale military assault would undoubtedly have significant negative consequences for financial markets. However, a full invasion is much less likely than is widely believed, and several other scenarios are more plausible. Indeed, there is a 50% chance that Russia’s military build-up is simply an elaborate ruse by President Vladimir Putin and that the situation will be resolved peacefully. For practitioners, the situation presents big investment opportunities and risks, across a range of asset classes.
- Marko Papic, Partner & Chief Strategist, Clocktower Group (Santa Monica)
AEDT 10.30am - Critical Issues Forum
We must prepare for a more fractured world
The past half-century brought about a world that’s globalised, centralised, and stratified. A stark divide exists between financial markets and the main streets of the world, and between companies and workers. There’s a simple reason for this - multinational firms can make money and hedge risks everywhere, while workers are tethered to all things local. This divide is behind our slower economic growth and polarised politics. The pendulum had swung too far towards the global. Now, it’s swinging the other way. Everywhere, a new economic order is taking shape as we enter an era of more inclusive and sustainable localisation. Supply chains will shorten, decentralised technologies will rise, and industries that had once been international will become more regional, bringing wealth back home. As we shift to a bipolar or tripolar world, in which the US and China decouple more rapidly, and Europe lives somewhere in the middle, practitioners should seek to understand the implications for different asset classes, sectors and geographies.
- John Mearsheimer, PhD, R. Wendell Harrison Distinguished Service Professor, Political Science Department, University of Chicago (Chicago)
- Tom Switzer, Executive Director, Centre for Independent Studies (Sydney)Prep!
Watch: We must prepare for a more fractured world - an introduction
Read: It’s not just the economy, stupid
AEDT 11.20am - Critical Issues Forum
Growth managers that lack energy may be left out in the cold
Cracks seem to be appearing in recent Covid winners, as the sensitivity to earnings/guidance misses has grown, as exhibited by strong price declines for more “innovative” market darlings. These companies have a high likelihood of falling into the “overearning” camp, where expectations may be far too high, thus pull forward risk is underappreciated for the quality and durability of earnings growth in the future. They appear all offence and no defence! Investors shouldn’t overlook the potential benefits of focusing on the “underearning” camp, particularly companies in the energy sector, where earnings are likely to be far higher and of better quality than market participants may be giving them credit for. It looks like what’s “old” will be “new” again, and those investors and managers that are lacking energy may find themselves left out in the cold.
- Rajiv Jain, Chairman, Chief Investment Officer and Portfolio Manager, GQG Partners (Fort Lauderdale)
AEDT 12.00pm - Lunch Break
AEDT 12.40pm - Special Interests Forum 1 - choice of concurrent sessions:
1. The best form of defence in fixed income is a strong offence
In a world of rising yields, finding value in bond markets is as challenging as it’s ever been. Fixed income investors must know that what’s worked in the past might not work going forward. Duration is a key consideration to delivering meaningful bond returns, however its role in offering investors a safety net in times of stress is going to be severely tested over the next few years as central banks tighten monetary policy. It is during these times when a braver and broader approach is required, by going on the offensive in fixed income. By taking on more risk (relative to benchmark), and adopting a truly global fixed income opportunity set, investors are giving themselves tools that can help mitigate duration-led losses in their fixed income portfolios.
- Joran Laird, CFA, Global Fixed Income Portfolio Specialist, T. Rowe Price (Queenstown)
2. A reckoning approaches and the outlook for many markets is poor
Complacency reigns after 40 years of falling interest rates and inflation, with soaring asset prices. The wounds of prior cycle-ending events have healed, their lessons forgotten. The post GFC period has seen a “collateral spiral”, central bank bond buying forcing asset prices to ever higher levels – yes, quantitative easing matters. But retail investors and the emotion of a genuine bubble were missing. No longer. All the indicia of a colossal equities bubble are in place. If you are not thinking along the lines of 1929, the late 1960s, 1989 Japan, 1999 – you should be. A reckoning approaches. But genuine asset price bubbles draw energy from “anti-bubbles” and there is a lot to own for the next five years if you are prepared to go where the crowd is thinnest, allowing you to be on offense as you defend your clients’ portfolios.
- Julian McCormack, Analyst, Platinum Asset Management (Sydney)
3. Right now, it makes sense to sit on the credit fence
Historically, sitting on the fence has implied indecisiveness. But can a high conviction view be a lack of conviction? Investors may be facing a regime shift in markets that changes the traditional relationship between growth and defensive allocations. In a low conviction world, an allocation to a blend of public and private credit makes sense. It allows investors to sit on the fence, retaining flexibility through a period of heightened uncertainty while still generating an acceptable return.
- Pete Robinson, CFA, Head of Investment Strategy - Fixed Income, CIP Asset Management (Sydney)
4. The crowded equity trade won’t save investors
The US outperformance of other equity markets, fuelled by the rise of passive funds, has stretched the earnings multiples for US large cap stocks. Global microcaps offer investors an unparalleled opportunity to invest in economic or market recoveries. They led markets out of the dot-com crash, the GFC, and Covid. This is a segment of the market with its own unique cycle. Marching to the beat of its own drum, the global microcaps sector lowers systematic portfolio risk. Their asymmetry around large market events provides investors with a powerful offence that is a great portfolio defence.
- Gino Rossi, CFA, Portfolio Manager (Global Microcaps), Spheria Asset Management (Sydney)
AEDT 1.20pm - On the move
AEDT 1.30pm - Critical Issues Forum
Sustainable dividend growth outperforms over the long-term
Over the long-term, dividend growth and dividend yield are the dominant sources of long-term return. Valuation’s importance recedes over time. Therefore, one of the most important decisions taken around the boardroom table is the annual dividend declaration. This is where the board link past success with optimism for the future. Re-investing too much can lead to sub-optimal capital allocation whereas paying out too much can impact upon long-term business growth. Sustainable dividend growth companies appear to play defence well, as this cohort provides the best returns with lowest volatility over long-periods of time. These businesses can be characterised as having consistent pay-out ratios that allow for sufficient re-investment in the business to drive long-term growth and therefore shareholder returns.
- David Keir, CA, CFA, Partner, Dundas Global Investors (Edinburgh)
AEDT 1.30pm - Critical Issues Forum
DIG in! Stakeholder capitalism will boost shareholder value
The game has changed - the 2010s is the wrong analogue for the 2020s, a time when major transformations will lead to more investment in technology, broader sharing of income, and greater greening of the world economy than we have ever seen. It will likely lead to higher growth potential, supporting investments in equities, credit, private assets, and real estate. At the same time, core bonds in many areas have already significantly repriced and are set to play an important defensive role in what is a fast-moving cycle. So, DIG in for an important era, when stakeholder capitalism displaces shareholder capitalism and becomes the main route to boosting shareholder value.
- Tony Crescenzi, Market Strategist & Portfolio Manager, PIMCO, (New York)
AEDT 2.10pm - Critical Issues Forum
Climate change risk factors are changing asset valuations
The next decade of decarbonisation is the decade of opportunity to de-risk portfolios and identify green investments. Many regulators, exchanges and clients throughout the value chain expect sustainability to be a strategic focus. Climate change risk factors are changing asset valuations. Key to success is the need for portfolios to account for climate change risk or risk being obsolete. Today’s company models and quantitative strategies must incorporate the financial Impacts of a carbon price, climate-related physical risks and Paris Aligned trajectories in order to be resilient for future climate change events. Global standards such as IISB, NGFS and PCAF are evolving to ensure a consistent standardised approach. In the transition to a net zero world, there will be those that lead the game and those that are led.
- Michael Salvatico, Head of Asia Pacific ESG Solutions, S&P Global Sustainable 1 (Sydney)
AEDT 2.50pm - On the move
AEDT 3.00pm - Special Interests Forum - choice of concurrent sessions:
1. Rising rates will bring back discipline to market valuations
Rising interest rates will create casualties and collateral damage in asset prices, but will bring back market discipline. Post pandemic, the global economy is re-opening and so are markets, resulting in excess demand, price increases and what seems to be full employment. QE is in reverse. Central banks are beginning their run to raise interest rates from historically low levels, after using Quantitative Easing programs to provide demand to suppress bond yields. Markets have not gone through such a large transition before and therefore there will be uncertainty. A return of market discipline will require a rethink of what “defensive” even means, a very different playbook for active management.
- Richard Quin, Chief Investment Officer & Principal, Bentham Asset Management (Sydney)
2. Climate change requires offence and defence, just not now
Regulation and policy to achieve global net zero targets will drive profound changes in the global economy in coming decades. The impacts are predictable and likely to be negative for equities markets over the medium to long term, driving long term returns below historical levels. In the long term, the beneficiaries of climate change action are likely to outperform and provide significant but sporadic opportunities but, in the short term, that is not the case – inflated expectations and poor industry economics have driven predictable underperformance that is likely to continue. In achieving longer term objectives, climate change demands both a defensive strategy to mitigate longer term risks and an offensive, tactical, approach to capitalising on opportunities.
- Tom King, OAM, Chief Investment Officer, Nanuk Asset Management (Sydney)
3. Private debt is the best all-weather defensive strategy
A great attack scores points, but defence wins premierships. The same principal applies to investment portfolios where, by attacking with allocations to growth stocks, investors can run into problems when equity markets fall. But by making private debt the centre of a defensive strategy, investors can win in all conditions. Private debt protects investors via its position in the capital structure, contractual obligations and the close relationship between borrower and lender. It also shields investors’ income against inflation and interest rates by pricing at a margin above official rates. So, as central banks signal rate rises this year to combat inflation, the price and earnings of equities may fall, but private debt investors’ income should rise. Those who understand these advantages know that private debt is the best defensive strategy for all market conditions.
- Andrew Lockhart, Managing Partner, Metrics Credit Partners (Sydney)
4. The odds aren’t favouring froth
Inflection points in inflation, interest rates and the large-scale monetary distortion of recent decades suggest the future will not repeat the same playbook as recent decades. Theoretical, mathematical and backward-looking approaches to portfolio construction risk exactly the same errors as those befalling central banks at present - errors which have significantly distorted economies. In reality, investment and economics incorporate significant elements of human behaviour and luck. Understanding the payoff profile of investments is crucial to portfolio construction with current market valuations looking remarkably distorted.
- Martin Conlon, CA, Head of Australian Equities, Schroders (Sydney)
AEDT 3.40pm - Afternoon Break
AEDT 4.00pm - Special Interests Forum - choice of concurrent sessions:
1. The key risks to markets are hiding in plain sight
The extraordinary increase in equity markets and home prices since 2019 and the tightening of financial conditions leave investors exposed to a major correction. This is the time for caution and prudence. Excessive market values of equities and rampant speculative excesses are at levels not seen in modern times. Many expect that the end of the pandemic, reopening of economies, tight labour markets and excess consumer savings will push markets higher, but the warning signs are hiding in plain sight. Proceed with caution, the best offence is a great defence.
- Arvid Streimann, CFA, Head of Macro and Portfolio Manager, Magellan Financial Group (Sydney)
2. Now may be the time to consider CRE debt
Record low interest rates have fundamentally changed the playbook for income investors. The traditional havens of stocks and bonds are out of reach with compressed yields and stretched valuations. This has made the search for reliable and attractive risk-adjusted sources of income a dominant narrative for investors, who may often resort to an undesirable move up the risk curve to maintain returns. For institutional and wholesale investors, CRE debt is widely accepted as an asset class, providing diversification and strong, risk-adjusted returns. Australia has a relatively under-developed private debt market, with big banks historically dominating. With banks withdrawing, alternative lenders have greater opportunity. Coupled with rates likely to rise in 2022, it may be a good time to consider CRE Debt.
- Nick Bullick, Senior Director, Qualitas (Sydney)
3. PE to outperform in 2022 and most of you will miss out
Rising inflation, the end of a 30-year interest rate super cycle, quantitative tightening, and continued uncertainty around Covid make for turbulent times ahead. Private Equity (PE) has historically outperformed listed indices, and current macro settings will provide a further wedge of alpha for PE’s active hands-on approach. Although traditional barriers to participation in PE are fading, PE remains on the bench for many individual investors. With an end to easy value creation and challenging conditions ahead, don’t miss out on PE outperformance in 2022.
- Martin Cox, Head of Private Markets, Milford Asset Management (Sydney)
AEDT 4.40pm - On the move
AEDT 4.50pm - Critical Issues Forum
The best offence is a great defence! Key takeouts
Our diverse panel of experts debates which of the high conviction propositions they heard during Markets Summit 2022 resonated most strongly, and which they disagreed with most - and the portfolio construction implications.
- Alex Lennard, Investment Director, Ruffer (London)
- Chris Iggo, Chief Investment Officer Core Investments, AXA Investment Managers (London)
- Daniela Jaramillo, Director - Sustainability, Fidelity International (Melbourne)
- Jacob Mitchell, Founder, Chief Investment Officer and Lead Portfolio Manager, Antipodes Partners (Sydney)
- Jonathan Armitage, Chief Investment Officer, MLC Asset Management (Sydney)
- Tim Farrelly, Principal, farrelly’s Investment Strategy (Sydney)
AEDT 5.45pm - Markets Summit 2022 ends
Followed by a Networking Reception in the live studio, ending 7.00pm.