Quarterly review, Q3 2021: Think Long-Term, Think Thematic

A question of outlook

Investing, at least from the perspective of successful asset management, should be thought of as a long-term activity. It demands a financial outlook that is measured in years, if not decades.

By contrast, a financial outlook measured in months or even weeks could be regarded as speculating. Worse still, a financial outlook measured in days or less might reasonably be described as gambling.

Surveying Invesco’s Q3 2021 thought-leadership outputs, three themes in particular appear central to the current investment thinking of anyone whose financial outlook extends beyond the immediate future. They are inflation, climate change and technology.

Inflation will almost certainly be the shortest-lived of these. Looking considerably further ahead, the hope is that efforts to combat climate change will have a truly significant impact within the next quarter-century or so. Meanwhile, technology no longer constitutes a mere constant: it has become a relentless accelerant.

In this review we revisit some of our recent insights into each of these themes. In doing so, we not only aim to demonstrate the merits of thinking for the long term: we also attempt to show that successful investing may be increasingly thematic in nature.

Inflation: repeat, rhyme or reflate?

Since our Mid-Year Investment Outlook 2021, published at the end of Q2, the market debate has tilted further towards inflation fears. We believe that inflation is likely to prove transitory, that monetary policy should eventually normalize and, crucially, that relfation will follow.

Arnab Das, our Global Market Strategist in EMEA, explains why in The Long and the Short of It: Inflation or Reflation? Torturing the Data. He argues that reflation remains the most likely outcome – particularly given policymakers’ determination to contain the COVID-19 pandemic, head off high inflation and prevent deflation – but warns that recovery could be more uneven and staggered than originally envisaged.

In a follow-up piece, Stagflation – A Rerun of That ’70s Show?, Das addresses the prospect of high inflation in concert with rising unemployment and weak or even negative growth. This bleak blend was most memorably witnessed amid the adverse supply shocks, suffocating regulation, widespread capital controls and financial repression of the 1970s.

Das concedes that present-day dynamics such as supply bottlenecks, labor shortages and restrictions on the cross-border movement of goods, services and people could promote stagflation’s return. He points out, though, that the economics and politics of today are very different to those of almost half a century ago and that diversified, constructive portfolios should help guard against such a possibility.

If inflation is to prove transitory then the question of how long the transition might last inexorably arises. Upside-Down Theories of Inflation suggests that the excess money pumped out by central banks could take some time to “work its way through the system”. “To deal effectively with inflation,” says John Greenwood, Invesco’s Chief Economist, “US Federal Reserve officials first need to understand what’s causing it – and that could be months or years away.”

Climate change: a challenge of undiminished significance

While inflation is widely expected to be tamed in comparatively short order, climate change is set to remain a threat for decades to come. Even the far-reaching disruption wrought by COVID-19 has not displaced it as the greatest challenge confronting the world.

According to the Invesco Global Sovereign Asset Management Study 2021, the pandemic has led to even greater awareness of the environmental impact of human activity. Many of the respondents who took part in this year’s survey did not believe climate change to be fully factored into market prices, while climate-change-related strategies – along with others guided by ESG concerns – have gained further ground among sovereigns and central banks alike.

Asset managers have a fiduciary duty to keep pace with the latest developments in this space – or, better still, to contribute to them in a positive way. The Q3 2021 edition of Risk & Reward, our quarterly round-up of cutting-edge research and investment solutions, offers two examples of Invesco’s ongoing commitment and creativity.

The first combines sustainable investing and natural language processing to build customized portfolios aligned with the journey towards net-zero emissions and other climate-centric targets. The second uses a novel approach to asset allocation to achieve both low volatility and low exposure to carbon.

As stressed in Uncommon Truths: Climate Change Revisited, disturbing evidence of environmental decline has continued to mount while COVID-19 has dominated the headlines. To quote Paul Jackson and András Vig, of our Global Market Strategy Office: “It feels as though tipping points are being crossed.” So where might the best hope for mitigation and adaptation ultimately lie?

Technology: an all-encompassing accelerant

Perhaps inevitably, it appears to lie in technology. Reflecting humanity’s lengthy track record of innovating its way out of trouble, the long-term security of the planet and its inhabitants is likely to depend on inventive, radical and even unconstrained thinking.

This presents potentially unprecedented opportunities for investors – as does progress in numerous other fields. Moreover, to view such matters in terms of opportunity is not to trivialize them: rather, it is to recognize responsible investing’s vital role in bringing about urgently needed change.

From the perspective of generating attractive returns, as explained in Dissecting the Next Big Thing, it is not always sufficient to back a sector’s established giants. Backing those businesses that will become giants can be even more rewarding over time. In other words: it might be easy to identify the architects of a tech revolution, but investors would do well to identify its enablers as well.

As we gaze ever further into the future, of course, it becomes harder to imagine precisely where tech’s unremitting march might lead. The sphere of financial services is no exception. Colin Fitzgerald, Invesco’s Head of Distribution in EMEA, paints an optimistic picture in Towards Tokenization and Why AI in Financial Services Is Not an Accident Waiting to Happen.

Fitzgerald outlines how advances such as blockchain, artificial intelligence, machine learning and big data are poised to democratize investing and help more people understand how to get the most from their money. As an industry, we should benefit not only our clients but countless other stakeholders if we are able to encourage a long-term outlook alongside such welcome shifts.

Selected thought-leadership outputs for Q3 2021

The Long and the Short of It: Inflation or Reflation? Torturing the Data

Arnab Das, Global Market Strategist

Published July 2021

Stagflation – A Rerun of That ’70s Show?

Arnab Das, Global Market Strategist

Published September 2021

Upside-Down Theories of Inflation

John Greenwood, Chief Economist

Published September 2021

Invesco Global Sovereign Asset Management Study 2021

Rob Ringrow, Head of Official Institutions

Published July 2021

Risk & Reward

Erhard Radatz, Senior Portfolio Manager, Invesco Quantitative Strategies (IQS)

Manuela von Ditfurth, Senior Portfolio Manager, IQS

Yifei Shea, Senior Quantitative Research Analyst, IQS

Margit Steiner, Senior Quantitative Research Analyst, IQS

Marcus Axthelm, Americas Director, Systematic and Factor Investing

Published August 2021

Uncommon Truths: Climate Change Revisited

Paul Jackson, Global Head of Asset Allocation Research

András Vig, Multi-Asset Strategist

Published August 2021

Dissecting the Next Big Thing

Henning Stein, Global Head of Thought Leadership

Published September 2021

Towards Tokenization

Colin Fitzgerald, Head of Distribution, EMEA

Published August 2021

Why AI in Financial Services Is Not an Accident Waiting to Happen

Colin Fitzgerald, Head of Distribution, EMEA

Published September 2021