By Simon O’Donoghue, chair of the Channel Islands Wealth Management Association and chief executive of Spring-IM
THE investment world is a dynamic and ever-evolving landscape in which the investor must navigate the often-challenging terrain seeking to maximise returns while minimising risks. Investors face an array of factors that influence these pursuits including technological advancements, shifts in global markets and economic dynamics.
Let us consider just last year. It was a disastrous year in many ways for investors. War erupted in Europe and global inflation surged to highs not seen in 40 years. Central banks responded by tightening monetary policy at a pace not seen since the 1970s and investors found they had nowhere to hide, with global equity and bond markets falling in tandem, posting their worst run of performance in decades with double-digit negative returns for the calendar year.
Fast forward to 2023 and where do investors find themselves now? You can’t talk about the current investment climate without mentioning inflation and, specifically, ‘sticky inflation’. The UK ultimately has a sticky inflation problem. The Bank of England was the first major central bank to start raising rates back in December 2021. However, despite being one of the first to announce rate hikes, it has had less success in taming price pressures than its friends in Europe and the US. These inflationary pressures continue, with the BoE so far lifting its main policy rate to 5.25%, marking a 14th consecutive increase. Across the pond, the Fed has already hiked its main interest rate to the highest level in more than two decades to 5.5%, marking the 11th increase since early 2022.
It’s safe to say that 2023 is shaping up to be a tough year for investors and investment managers alike. Sticky inflation remains a challenge on both sides of the Atlantic, adding to interest-rate uncertainty. Nevertheless, there has been progress in the fight against inflation. Although it’s too early to declare victory, better core inflation data has begun to trickle through, paired with a generally resilient macroeconomic backdrop. This was not, however, true for China, whose economy fell into deflation this July.
These collective economic struggles, paired with a recent spike in bond yields, caused a reversal in the positive momentum seen in share prices over the prior few months and resulted in a sharp equity market correction only to be saved at the last minute by a techled rally in late August. In the first half of the year, 70% of the performance of the S&P 500 Index was driven by just seven technology stocks. Artificial Intelligence stock NVIDIA was up nearly 6% alone in August but, with the bulk of performance concentrated in just a small number of stocks, many investors may have missed it.
Ironically, the mega-cap technology stocks that led charge of the rally were forecasted to have a tough year due to higher interest rates. Where investors shied away from the sector earlier in the year, it transpires that tech stocks have performed remarkably well thanks to a growing enthusiasm for AI-related themes.
Investors are now asking whether it is too late to get in on the tech-led action and whether the rally has peaked. This is not the first time that a global index such as the S&P 500 has been driven by a few peak names and it won’t be the last. Portfolios with broad index exposure may still be able to capture any potential additional rally and whatever the next big thing may be.
Just how should investors navigate this challenging landscape and how is this landscape evolving? If we look again at technology, arguably one of the most transformative trends is in the investment industry, as the integration of tech and AI-led processes continues to reshape the investment industry as we know it. Roboadvisors, for instance, have gained immense popularity, offering automated and cost-effective investment management solutions.
The deployment of AI and machine learning has empowered investors to analyse vast troves of data, facilitating data-driven investment decisions. Blockchain technology, designed for enhancing transparency and security in financial transactions, is also gaining prominence, promising to revolutionise aspects of investment and asset management. Investors, and particularly investment managers, should seek to embrace the use of technology to bring about better decision-making processes and cost efficiencies for the end client or run the risk of being left behind in this fastmoving, developing industry.
While technology has arguably been the biggest positive trend of 2023, sustainable investing continues to be increasingly popular. Investors are ever more inclined to align their portfolios with their values. This movement is underpinned by the environmental, social and governance criteria, which assess a company’s impact on the environment, society and governance practices. Firms that prioritise sustainability are often perceived to be more resilient and better positioned for future success. Consequently, the investment landscape has witnessed a proliferation of ESG funds and sustainable investment strategies, reflecting a broader societal shift toward responsible investing.
The rise of a younger generation of investors, such as millennials and the Generation Zs, is resulting in these demographic shifts, investing for generational change and fuelling interest in technology-related investments, digital assets and sustainable investing. Understanding and adapting to these generational shifts is crucial for investment managers seeking longterm success for their clients as demographic trends exert a substantial influence on global markets and resulting investment strategies.
This year has also seen a large shift to cash. With rising interest rates and economic uncertainty, many investors opted to disinvest their portfolios in favour of fixed deposits, high-interest saving accounts or cash products. In times of market turmoil, it is natural for investors to want to take action and try to protect their portfolios. However, strategic multi-asset portfolios are most effective in helping long-term investors achieve their financial goals if investors observe discipline, especially during periods of market volatility. Participating in equity markets through downturns and heightened volatility allows investors to benefit from the best trading days and any subsequent rally. And while not all multi-asset portfolios are created equal, a low-cost portfolio with a strategic multi-asset allocation should serve long-term investors well through various economic and market conditions.
Finally, and possibly most importantly, regulatory changes are a significant factor shaping the investment industry. Staying abreast of regulatory developments is paramount and we, at the Channel Island Wealth Management Association, work closely with the regulator to prepare our members for any changes that may arise. We are continually identifying trends that will impact the wealth management industry and have a responsibility to our members to ensure that the Channel Islands are in tune with global industry initiatives and act accordingly so that the islands are leading the way.
