Longer term, investors must position themselves for the reality of a growth-saturated world in which sustainable growth and innovation will become the primary drivers of performance.
Although markets have risen, investor sentiment remains cautious, at times defensive, and often driven by macro event risk rather than company fundamentals. This caution stems from the fragmentation related to subdued growth and low visibility as well as the process of giving life support to a global financial system undergoing deleveraging. It is also a result of the ongoing structural pressures of demographics, climate change and the emerging market supercycle.
But as the economy starts to normalise, including interest rates over the next two years, companies should arbitrage between the two segments of the financing market to borrow, restructure or support M&A and investors will start re-allocating to equities after extraordinary profits in bonds.
Growth in the boom years was based on a resource-intensive model predicated on high levels of debt. The events of the past five years have proven this level of debt to be untenable, but it has been less widely acknowledged that it is also unsustainable from a resources perspective.
The world population in 2012 surpassed 7bn and by 2050 is on track for a further 30 per cent increase. Similarly, the pace of GDP growth has accelerated and resource usage has increased dramatically and commodity prices have risen.
To achieve forecast GDP growth, the Organisation for Economic Co-operation and Development (OECD) expects that 35 per cent more food, 37 per cent more energy and 70 per cent more resources will be needed. Yet analysis by the Global Footprint Network suggests that we are already using planetary resources at 1.5 times the rate at which they can regenerate.
The depletion of the planet’s resources is not news. But the point is, it is misguided to believe the global economy has the means to return to such unsustainably high levels of growth given the environmental constraints and the need to re-build the economy without recreating the debt bubble. This need not be a pessimistic end-note. On the contrary, there are abundant opportunities for investors to exploit but it may require a change in mind-set from the previous decade.
Careful stockpicking will be all the more important as investors understand how this low-growth world will impact companies and look for investments with sustainable growth trajectories.
Given the US and China have stabilised and will slowly improve in 2013 while Europe’s deterioration decelerates, the scope for global equities to perform in 2013 is quite positive.
Virginie Maisonneuve is head of global and international equities at Schroder Investment Management