Article

Rebuild: Framing the Current Potential Opportunity

• by CAIS

Part 2 of 3

In the wake of the devastation caused by the pandemic, many countries and regions are just starting their long march back to normalization. As this occurs, it is becoming increasingly clear from our discussions with fund managers and advisors, that they believe that the global economy has undergone a structural shift that has likely changed the future opportunity set in several key ways.

First and most notable of these was the rapid acceleration in the adoption of digital technology. A 2020 McKinsey Global Survey found the pandemic had speeded adoption of customer and supply chain technology by 3 to 4 years, and digital and digital enabled products by 7 years[1]. Additionally, the shift from brick-and-mortar retail accelerated due to lockdowns and social distancing mandates, with an EY Survey finding that the pandemic has changed the way 80% of consumers shop, with 60% of respondents doing less in-person shopping today than they did pre-pandemic[2]. This has potential implications for traditional retail real estate, but may create opportunity for industrial distribution warehouses that support online shopping, not to mention the technology companies transforming industries and the data centers and infrastructure that support them.

 Looking to the markets themselves, the pandemic snapped the 11-year bull market in domestic equities, shaking investor confidence that traditional investments and strategies could deliver the same risk-adjusted returns in the future[3]. Numerous capital market assumptions from asset management companies such as BlackRock[4] and AQR[5] anticipate the Global 60/40 stock-bond 5- to 10-year portfolio returns to be in the low-to-middle single digits. Compounding the issue is that the massive global monetary and fiscal response has stoked inflationary fears[6], threatening to reduce the real returns (inflation adjusted returns) from these investments. The response from the market has been heightened volatility, albeit placing it back to a normalized range[7], as well as a repricing of bond yields[8] where bond prices have declined as interest rates increase.

This comes at a time when interest rates are at historic lows[9], with little to no place for rates to go but up. Such a situation offers investors little in the way of income or immunization against equity market volatility as they have traditionally. It not only may require investors to cast a wider net for income alternatives, such as private debt, real estate and infrastructure, but also to look to uncorrelated assets, such as global macro, equity market neutral and event driven hedge funds to seek to offset equity market volatility and to potentially deliver positive absolute returns irrespective of the movement in broader markets. Structured solutions with their defined outcomes, may also play a role in navigating future market uncertainty and gyrations.

Finally, both institutional and retail investors have begun to flock to digital assets such as Bitcoin[10] and Ethereum[11] given the global macro uncertainty and rapid monetary printing that weakens the value for fiat currencies like the USD. As a potential store of value and global macro hedge, we’re increasingly seeing investors access this high volatility diversifier.

Taken together, all these influences potentially create an opportunity for investors to consider how to rebuild their portfolios for the challenges and opportunities arising from structural shifts that have occurred during the pandemic.


1. McKinsey & Company, “How COVID-19 Has Pushed Companies Over the Technology Tipping Point”, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-covid-19-has-pushed-companies-over-the-technology-tipping-point-and-transformed-business-forever, accessed 5/17/2021

2. EY, “The Now, Next, Beyond Consumer”, https://www.ey.com/en_us/future-consumer-index, accessed 5/17/2021

3. Charles Schwab, “Why Market Returns May Be Lower and Global Diversification More Important in the Future”, https://www.schwab.com/resource-center/insights/content/why-market-returns-may-be-lower-in-the-future, accessed 5/21/2021

4. BlackRock, “Capital Market Assumptions”, https://www.blackrock.com/au/intermediaries/insights/blackrock-capital-markets-assumptions, accessed 5/17/2021

5. AQR, “2021 Capital Market Assumptions for Major Asset Classes”, https://www.aqr.com/Insights/Research/Alternative-Thinking/2021-Capital-Markets-Assumptions-for-Major-Asset-Classes, accessed 5/17/2021

6. The New York Times, “Inflation Fears Abound as Gas and Lumber Shortages Bite. Should the Fed Worry?”, https://www.nytimes.com/2021/05/17/business/economy/fed-inflation.html, accessed 5/17/2021

7. Barron’s, “Stock Market Volatility Is Back. These Funds Can Help Manage It.”, https://www.barrons.com/articles/stock-market-volatility-is-back-these-funds-can-help-manage-it-51620931331, accessed 5/17/2021

8. MarketWatch, “10-year Treasury Yield Books Biggest Weekly Climb in Over a Month”, https://www.marketwatch.com/story/u-s-treasury-yields-hold-ground-even-as-inflation-picks-up-11619787921, accessed 5/17/2021

9. CNBC, “The Fed Keeps Rates Near Zero”, https://www.cnbc.com/2021/04/28/the-fed-keeps-rates-near-zero-heres-how-you-can-benefit.html, accessed 5/17/2021

10. Coindesk, “Bitcoin 1Q Retail Flow Exceeding Institutional Investment”, https://www.coindesk.com/bitcoin-retail-flows-jpmorgan, accessed 5/21/2021

11. Crypto Briefing, “After Bitcoin, Institutions Finally Turning to Ethereum”, https://cryptobriefing.com/after-bitcoin-institutions-finally-turning-ethereum/, accessed 5/21/2021