Schroders' global investment specialists share their views on some of the key factors influencing markets, highlighting how deglobalization, decarbonization and demographics are going to reshape the investment landscape.

Geopolitical tensions have accelerated the need for countries to end their dependence on traditional energy sources, and strengthened their resolve to transition to cleaner forms of energy.

“That is why the deglobalization trends we’re seeing today are intertwined with decarbonization trends. These are two of the Ds which make up the "3D Reset" reshaping the global economy and markets,” Schroders' investment specialists said in a statement on Friday.

“So, it's perhaps unsurprising that investors are responding to these two seismic trends in very similar ways, according to the Schroders Institutional Investor Study (SIIS),” they said.

When asked about which asset classes will give the best medium-term investment opportunities under scenarios of deglobalization and decarbonization, the study reveals that respondents picked out equities in developed markets and infrastructure/renewables as their top choices. 

“We also know that demographics – the third D of the 3D Reset – is a key factor in how some of the changes currently reshaping the global economy are likely to play out,” they said. “China’s Covid-19 lockdowns exposed the vulnerabilities of a globalized model of extended supply chains, compounding disruptions resulting from geopolitical tensions between the US and China pre-dating the pandemic.” 

“But the reset of supply chains is not occurring in a vacuum – demographics are an important factor as multi-national corporations (MNCs) seek to diversify and improve the security of their supply chains,” they said.

“The working age populations of the world’s largest economies are forecast to be shrinking by the end of this decade as populations age. But not all countries will be affected to the same degree,” they continued.

Equities benefit from globalization reset
Schroders think that emerging markets with more favorable demographics for labor-intensive manufacturing are challenging China’s status as the “factory of the world.”

“India, for instance, is an attractive market for MNCs looking to diversify their manufacturing exposure. In contrast to many countries, its working age labor pool is forecast to keep growing,” they said. With the country touted as having one of the world’s largest and fastest-growing economies, India’s growing allure has also been highlighted by other investment managers. See more here and here. 

For this reason, Schroders thinks it is not surprising to see respondents in the SIIS single out emerging market equities as they position for demographic trends in the medium-term.

“In developed markets, opportunities may be more smart manufacturing-related, centered around the intersection of manufacturing and technology. By contrast, opportunities in emerging markets and Vietnam (a frontier market for equity investors) may be more labor-intensive manufacturing,” David Rees, senior emerging markets economist, said. 

Inflation pressures to spur innovation 
Schroders believes that major shifts in the three areas of decarbonization, demographics and deglobalization are expected to have significant long-term implications on the global economy, most likely resulting in greater medium-term inflation pressures.

“Central banks are currently raising interest rates to bring inflation to heel. If they succeed, as expected, it seems very likely that the cost of doing so will be an economic slowdown, and recession in some instances,” they said.

But even once the immediate problem is addressed, Schroders thinks that inflation pressures will persist in the new economic regime: “All of this means investors need to revise their investment strategies, if they are to manage risk and find opportunities in a changing world.” 

“A renewed focus on private assets more broadly (which encompass infrastructure/renewables, other real assets such as real estate, as well as private equity and private lending) are another way some of the world’s largest institutions are repositioning,” they continued.  

“If we continue to see inflationary pressures long-term, investors are going to look at areas which will help solve that inflation problem. One of these things will be the ability to invest in technologies that will help mitigate inflation long term, which naturally leads to private assets in addition to public markets,” Adam Farstrup, head of multi-asset, Americas, said. 

In light of the 3D Reset, Farstrup believes companies will invest in technology that increases productivity to protect profit margins, leaning more on robot and artificial intelligence use where possible.

“For investors, this could mean rich opportunities for active equity managers and private equity strategies that invest in these productivity-enabling technologies as well as businesses poised to benefit from these technologies,” he said.

“In this context, it is unsurprising that 67 per cent of respondents said they believe the energy transition will drive investment in innovation, creating significant investment opportunities,” Farstrup continued.  

Private assets to capture innovation trends
Similarly, when asked about how deglobalization could impact the global economy and asset allocation, 49 per cent of respondents agreed that institutional investors will seek more exposure into private assets and alternatives in order to capture innovation in productivity-enabling technologies.

“Powerful long-term trends such as decarbonization, deglobalization, and demographics, alongside the ongoing AI revolution, will drive a markedly different economic and geopolitical environment over the next decade and beyond,” Nils Rode, CIO of Schroders Capital, said. 

“Considering the importance of longer-term trends to many private assets investments, these themes are particularly significant. We see attractive investment opportunities in areas such as sustainability and impact aligned investments, renewable energy, generative AI, and investments in India,” Rode added.

As the global economic outlook changes from a long period of relative stability to an era of inflationary pressures and more volatile markets, investors are reassessing their strategies and allocation plans.

The importance of innovative technologies to meet future challenges supports the case for private asset investments, while investors also specifically identify infrastructure/renewables and equities as valuable assets to hold.