A New Era of Investing

In this buzz: Pure beta may be dead, or at least dormant for the foreseeable future and traditional 60/40 portfolio allocation between stocks and bonds may not deliver the returns investors require…

The days of super low interest rates, easy money and buy every dip may be in the review mirror. Pure beta may be dead, or at least dormant for the foreseeable future and traditional 60/40 portfolio allocation between stocks and bonds may not deliver the returns investors require.

With obstacles come opportunity though and the hedge fund industry certainly seems to sense that this new paradigm is an opportunity to show that delivering alpha is the path to outperformance. For investors who steer clear of hedge funds, today’s environment may require more active, selective investing in order to achieve desired results.

What is up for vigorous debate is what is the path forward for long-term interest rates? The case for higher rates is made through looking at post-recession history and backed up by supply chain pressures and inflationary factors around the globe. Many economists argue that “this time is different” (at least compared to the last 30 years or so) and that inflation will persist. Another camp expects inflation to ease as supply chain problems normalize. The jury is still out whether we are in for sustained inflation or risk slipping into a recession or stagflation.

One thing that is different this time, and it’s a big thing, is China. China has been long believed to be a key factor in driving down prices as demographic shifts saw a massive move from low to middle income. However, according to recent research by Blackstone’s Joe Zidle, a “negative replacement ratio and a falling prime age working population fundamentally change China’s role on the manufacturing stage. When China had a labor surplus, it drove costs down. But with its current labor deficit, China’s role as the preeminent low-cost, global manufacturer is being reevaluated.”

Whether China’s demographic shift is enough to counter supply chain problems, rate hikes, war and the end of easy money is up for debate. No matter which camp one falls in though, it’s probably wise not to count on beta to deliver substantial returns.