Uncertain times often require bold investment decisions. Here Newton FutureLegacy portfolio manager Bhavin Shah explains why it is important for investors to keep pace with a changing investment landscape.

In a world of heightened volatility, it is important for investors to put the odds on their side as best they can. For Newton’s Bhavin Shah, this means identifying and investing behind key themes arising in the new market and macroeconomic regime.

Shah thinks the investment environment ahead will be more volatile than in the previous decade. If investors want to meet their desired outcomes in a risk-adjusted way against this backdrop, they argue a fresh approach to investing is required.

He says many current investment models and assumptions are a function of the bygone beta bull market characterised by low interest rates and low inflation. Investors risk giving up gains from the past decade if they take too long to adapt to the new environment, he posits.

This environment is characterised by significant global shifts, including climate change, as well as changes in monetary and fiscal policy, and rising geopolitical risk. There is also a raft of elections across the world this year which is likely to add to the uncertainty and volatility in the shorter term, says Shah. 

“Traditional economic models tell you these are externalities and therefore you should ignore them as they are not going to impact cashflows,” he adds. “We would argue in the long run, you need to think about implementing these in portfolios as good investment practices because they are going to impact cashflows and the cost of capital. Thinking about this is important – especially at a tipping point in the cycle.”

Monetary policy

According to Shah, monetary policy is reaching its limit as higher interest rates have put paid to a 40-year bull run in equity markets. Governments have loosened fiscal policies and their deficits have ballooned, making markets “jittery”.

“Fiscal deficit is important because of the rise of debt it implies,” says Shah. “We are coming to the end of the secular decline in long-term interest rates and the market is getting jittery. If nominal interest rates stay higher than nominal GDP growth for an extended period, debt sustainability issues come to mind.”

But while high debt levels can be seen as a risk to markets, Shah says increased fiscal spending can create opportunities. He points to the roughly US$1 trillion of spending that has been legislated for in the United States through US$550bn for the Infrastructure Investment and Jobs Act¹, US$53bn for the CHIPS Act² and US$485bn for the Inflation Reduction Act (IRA)³. Of that earmarked sum, only a small amount has been allocated which, Shah argues, means there is a huge runway for infrastructure spending.

Concentration risk

The lower interest rate environment of the recent past helped fuel an increase in the concentration of the S&P 500 index – with the top 10 stocks accounting for around 30% of the total index⁴. On a global scale, the US accounts for almost two thirds (64%) of the MSCI All Country World Index⁵.

Shah notes this is important because with long-term interest rates acting as the discount factor on these long duration stocks, a higher-for-longer rate environment could see them derate. “This is a major risk, therefore from a sectoral and country level, it is important to diversify your exposures,” he adds.

The secular decline in interest rates also has implications for market volatility, says Shah. He notes in recent years the volatility in fixed income markets has decoupled from the volatility in equity markets. This, Shah adds, is because of uncertainty in fiscal and monetary policy and the fact that the market is pricing in an end to the secular decline in interest rates.

These dynamics, Shah argues, can create opportunities for active managers prepared to look at stock and macro fundamentals. He thinks passive investing does not do as well at times of big price swings in short periods and is prone to concentration risk.

“Moving towards a high inflation, low growth and high-rate environment, the dispersion between stocks and sectors has risen,” he adds. “The opportunity set has widened for active managers to go back to fundamental analysis to navigate the low liquidity environment.”

Great power competition

Elsewhere, Shah notes geopolitical risk, onshoring and populism are all on the rise. “Not only are we seeing wars in the physical sense, we are also likely to see trade wars, higher levels of protectionism and perhaps finance wars.

Odds on your side

With all this in mind, Shah says it is important for investors to think about their long-term objectives whether those be capital preservation, income, growth, or a combination of income and growth.

The FutureLegacy strategies Shah runs are designed to provide actively managed multi-asset global sutainable solutions in a volatile, inflationary low growth world. Investments within the range are selected using Newton’s own sustainable investment framework and are designed to be tailored to meet individual investors’ risk appetites.

The team uses a tactical overlay which allows the strategies to navigate shorter term market gyrations and ensure the appropriate level of risk for each strategy – a key lever to pull in a volatile and unpredictable market environment.

Commenting on the team’s investment approach, Shah adds: “Successful investing is highly probabilistic, so you need to put the odds on your side. One way of doing that is trying to invest behind some of the key structural themes that we see in place today.”

The value of investments can fall. Investors may not get back the amount invested. 

Sustainable Strategies Risk: The Strategy follows a sustainable investment approach, which may cause it to perform differently than strategies that have a similar objective but which do not integrate sustainable investment criteria when selecting securities. The Strategy will not engage in stock lending activities and, therefore, may forego any additional returns that may be produced through such activities.

¹UBS. Made in America – Protecting US infrastructure and independence. 27 June 2023.

²NTU.org. The House Chips Bill Is not Just $50bn for Semiconductors; It’s a $31bn Grab bag of Waste. 27 January 2022.

³CRFB. What’s In the Inflation Reduction Act? 28 July 2022.

⁴Goldman Sachs Global Strategy Paper, The Concentration Conundrum; What to do about market dominance, number 66. March 2024.

⁵Bloomberg. April 2024