Preparing your equity portfolio for the next 20 years

But with interest rates potentially rising, and the longer-term impacts of the pandemic and of technological change yet to be fully understood, how can a client have an equity exposure that is prepared for the challenges of the future?

Over the past decade, the performance of equities has been driven by the prevailing low bond yield and low-inflation environment, boosting stocks in the consumer durables and technology spheres.

These tend to be concentrated on the US market, which has now grown to account for around 60 percent of total, global, market capitalisation. 

In addition to the uncertainties around the 'escape' from the pandemic, and the technological revolution, the policies of governments around the world may also have changed, with higher levels of spending. 

Sunil Krishnan, multi-asset investor at Aviva Investors, says that while we cannot be certain higher inflation and growth are coming “there is an increased probability that this is the case.

"It is possible that coordinated monetary and fiscal-policy responses around the world have changed things, and it is possible that one outcome of the pandemic is that globalisation retreats a little bit, in that companies want supply chains that are nearer or that they want multiple supply chains, and that would be inflationary". 

While those are just some possible outcomes among many, it is prudent to have part of the equity allocation assigned to profit from this scenario.” 

He says that since the summer, he has been slowly increasing the weighting to value-type equities in his portfolios, as “the odds have shifted” towards these being the types of stocks that benefit. 

Ben Kumar, senior investment strategist at 7IM, says that just as the nature of economies are changing, so should the way investors think about value.

He says “valuations are things people look at a lot, but they can change very quickly, and sometimes for reasons that are not obvious, such as when the whole market falls for a specific reason, but some of the stocks won’t be impacted by that reason.

"I think the better approach is to look at how accounting needs to change and at how valuation metrics need to change.

"The problem is that the metrics we use today in the market, such as price to earnings, are not suitable for valuing technology companies, which expand in a different way from how industrial companies expand – and so using historic metrics may not be valid.

"Those historic metrics probably make technology companies look more expensive than they are”.

He says clients should try to have a “clear view on what comes next, and invest in that, but also have some exposure to the opposite of that”.

Keith Balmer, multi-asset investor at BMO Asset Management, says with the world in such a state of flux, it may be that even if a client can understand and predict the latest trends, it will be difficult to select the best companies to invest in to capture this growth.

He says the most prudent course of action is to wait until a company has become somewhat established before investing, even if this means missing out on some of the early growth. 

David Kneale, head of UK equities at Mirabaud, says: “Most of the last 20 years has been a time of momentous change: the re-emergence of the Chinese economy, the universal reach of the internet into almost all activities and almost unthinkable shifts in monetary policy immediately spring to mind.

"The Covid pandemic and Brexit (the latter a sideshow by comparison) look unlikely to leave much of a footprint on the global economy in a few years' time. They generate a lot of short-term uncertainty, but relatively little change over the longer term. 

"The far greater change will come from the transition to a zero-carbon economy, while adapting to the growing environmental changes that will build until we get there. As with the emergence of the internet, some of these changes are unknowable today.

"It will be at least as important to be adaptable as it is to be diversified.

"Investors will need to be very cautious about how they treat long-duration assets in fixed locations, especially those more dependent upon environmental conditions and in areas more likely to be heavily impacted by changing climate.”

Kneale says investors should be wary of paying very high valuations for stocks now in anticipation that growth in the future will justify this.

He says the lesson of the dotcom 'boom', was that while some companies did go on to justify the sky-high valuations ascribed to them, many others, such as Nokia, which seemed like “obvious” investments at the time, did not. 

While emerging markets seem an apparent area of long-term economic growth, Will Hobbs, chief investment officer at Barclays Wealth, says the long-term appeal is clear, but in the short term there is too much “fog” around the asset class. 

Suzanne Hutchins, a multi-asset investor at Newton IM, says she is at present very positive on the outlook for equities due to the amount of liquidity in the system – something that is likely to last a long time – and the fact that economies are growing again.