Déjà vu or Déjà New? Reflections from the 2023 Sydney GIF Themes & Opportunities Panel 

At our recent Global Investment Forum in Sydney, Jo Holden, Mercer’s Global Head of Investment Research and Consulting, moderated a panel on the concept of ‘Déjà New – from Hindsight to Foresight’. Read on for a summary of the discussion or discover more from our 2023 Themes and Opportunities outlook paper.

Rich Nuzum, Global Chief Strategist at Mercer, shared that extraordinary market events will regularly occur, and that especially in early 2023 the similarities with the 1970s were pronounced. We can see similarities such as the energy crisis and geopolitical risks and the possibility of a wage price spiral.

Harry Liem, Pacific Head of Research and Capital Markets, suggested there were further similarities to explore.  In the 1970s, not only did Australia and New Zealand experience an energy crisis and the Vietnam war, but also the decade started with a Labor Government. However, while we have seen some increase in wage inflation, it is less of a threat as unionisation is now much less. In addition, currencies can help buffer economic shocks and the Australian and New Zealand dollar were both floated in the mid-1980s. Inflation targeting was introduced in New Zealand in 1990 and Australia followed in 1993. Before that governments focused on maintaining full employment. Harry concluded that “with a AAA credit rating and an abundance of natural resources Australia is in a much better position than in the 1970s, both from an economic, but also multi-cultural perspective”.

Diversification and moving away from 60/40 remains a hot topic. Nick White, Global Strategic Research Director, commented “60/40 remains a risky proposition, as the low volatility, low inflation environment of the past decades is no longer.” An inflationary environment could easily extend positive correlations between stocks and bonds. Nick noted structural inflation pressures, such as protectionism, factionalisation, and climate change. 

Rich Nuzum suggests “There will continue to be opportunity ahead for private markets despite the already strong growth to date”. But “the real debate is about size and in-house versus external. It takes serious expertise to invest in private markets. Are you able to compete with your general partners by doing it in-house? Rich continued to suggest delegates consider all the risks with in-house alternative capabilities.

Harry Liem noted that in Australia and New Zealand most clients are comfortable diversifying into real assets, also given the limited size of local inflation linked bond markets. He also cautioned “diversification should not just be by asset classes, but also by risk factor”.

Investors also need to focus on how to deal with the risks posed by the modern crisis of climate change. The transition towards a more sustainable world gives rise to potential investment risks as well as opportunities for investors. 

Nick White mentioned various layers of a holistic approach to energy transition. The first layer of energy transition is EV, light transport, and renewable power. The second layer being heavy industry which is harder and needs technological solutions that are more scalable than they are today. The third layer is a broader transition in agriculture. The fourth layer would include biodiversity, water, and pollution. Fundamentally they are inextricably linked, and regulation is coming. Investors need to be aware of the structural risks across their broader portfolio and seek opportunities in strategies that can capitalise on the transition, for instance in the listed markets, with sustainably themed managers.

Rich Nuzum mentioned that emerging markets may be more at risk, as their focus remains on development finance, and basic needs such as infrastructure and education.

Harry Liem, who wrote a book on the topic, noted AI can impact more mechanical investment decisions over shorter time horizons, especially in areas such as high frequency trading, hedge funds or portfolio risk management. We may find new anomalies and may even end up in another AI quant crisis if everybody follows the same AI trading rules as machines mimic machines.

On the other hand, AI will not be able to compete over longer investment time horizons, as it simply lacks the deep understanding to do so. Humans can still think much more out of the box and see the bigger picture. 

Thus, while AI has the potential to disrupt, without deep understanding AI is likely to lead to data mining.

History may rhyme, but with AI and new ways of working, today’s investors arguably have greater degrees of freedom to play with than did their 1970s counterparts. Diversification and position for transition will continue to shape investors’ decision making and new opportunities will continue to emerge. 

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