What the Future Holds +

It’s hard to know where to look for investment returns in the current environment. A recent report from Pictet which looks at projections for the next five years could offer some insight.

I stress the word “projections” here. Although it’s one of the better reports I have read over the past month. There’s a lot going on in the report so here are some key takeaways:

Secular Outlook

“The returns investors can realistically expect from mainstream assets will be much weaker than the historical norm. Adjusted for inflation, returns from a traditional 50-50 portfolio of bonds and equities will be at around half their long-term average.

To make up for that shortfall, investors will have to look further afield and be ready to take on more risk. In practice, that means allocating more to equities - particularly emerging markets, as well as stocks and sub-sectors offering secular growth, such as clean energy and automation. Investors also need to compensate for taking on more risk by diversifying further into liquid alternatives and real assets.”

Pictet expects Europe and China to be the best-performing equity markets over the next five years, with initial valuations being a strong contributing factor – “euro zone stocks trade at a record 35% discount to their US peers on a 12-month price-earnings basis and China at a discount of around 50%, the widest in 20 years.”

They are positive on UK shares, pretty bleak on US equities, and basically don’t bother with bonds.

“Alternatives can no longer be considered optional extras”.

The report suggests that those with greater appetite for risk should allocate a quarter of a portfolio to alternatives. I don’t think this would be suitable for a lot of people for a number of reasons but it’s worth touching on alternatives as an asset class.

Alternative Assets

Alternatives refer to investments that fall outside of the traditional asset classes commonly accessed by most investors, such as stocks and bonds. They include commodities, private equity, private debt, infrastructure and real estate. And they can perform a number of different roles - diversification, protection from inflation, and securing returns that are independent of the broader market.

Alternative investments are complex, often illiquid and not always heavily regulated. For this reason, most alternative asset investments are held by institutional investors or accredited individuals.

‘Liquid alternatives’ give investors access to traditional alternative asset classes with improved liquidity. Unlike traditional alternative investments, liquid alternatives are structured within a regulated fund format. So investors can expect all the benefits associated with mutual funds and ETFs - greater transparency, minimum investment levels, higher degree of governance, as well as limits on leverage.

One alternative asset class the report doesn’t mention is art. Fine art is viewed as an asset class reserved only for a handful of ultra wealthy families trading Picasso’s across the globe. But this once off-limits asset class is slowly becoming more accessible. See Masterworks.

+ A $2 Trillion Free-Fall Rattles Crypto to the Core. "A market that has gone through several major downdrafts in its short life may be facing its biggest test yet." [Bloomberg]

+ Credit Suisse Found Guilty in Money-Laundering Case Tied to Cocaine Ring. Another one to add to the bank's never-ending list of scandals. It is the first time a Swiss bank has been subject to such criminal proceedings. It's also funny how they can claim to systematically engage in ESG principles. [WSJ]

💡 Sources of Interest:

Hong kong was not supposed to look like this. (A nonsense title IMO). “In 1997, many people assumed that after 25 years [of British colonial rule], mainland China would look more like Hong Kong.” Wishful thinking. What did anyone expect? Hong Kong was always going to look more like China after the handover, as it does now. The question is, with people leaving Hong Kong in droves because of this inevitability (some 157,000 in the first quarter of the year), can it survive a more tightly version of its former self? There is evidence for it, but I’m not yet convinced. [Gift Article: Washington Post]

Still waiting for an article titled “America was not supposed to look like this”.

Sticking with China:

+Nike's China Woes

Nike’s revenue and profit beat expectations last quarter, but there are problems beneath the surface.

Chinese lockdowns impacted around two-thirds of Nike’s business in the country, dragging sales in the region down by 19%.

A couple of weeks back, Qi Wang wrote about why Nike and Adidas are losing shares in China. For both companies, China accounts for around 20% of their worldwide sales. This used to be their fastest growing market. Now everything has changed.

“Nike’s market share in China fell to 25% in 2021, and Adidas’ share dropped to 14.8%. Meanwhile, Anta’s market share increased significantly to 16.2% and Li Ning’s share also rose to 8.2% last year.”

There are a few reasons why this is happening. The most intriguing one Qi states is the rise of nationalism in China, which is something I do see happening on the ground and which Qi sees as an irreversible trend. “The rising patriotism and cultural identity have prompted the Chinese consumers - particularly young consumers - to buy more domestic products.”  

Other reasons include more government support for domestic brands, Chinese technology innovation, better access to third and fourth tier cities and e-commerce presence.

Further, with Nike now leaving Russia, it provides ample opportunity for Chinese brands to make even more of a dent in Western companies’ market shares. Where do Chinese companies go from here?

+How Nike Won the Cultural Marathon. "After half a century there is no escaping the fact that, if Goldman Sachs was once described as the “vampire squid” on the face of humanity, Nike has become part of the root system that underlies the culture. And not just sneaker culture." [Gift Article: New York Times]

+Why beauty matters, and how it has been destroyed by “usability.” This thread is great. A look at the built environment and how beauty has lost its personality in a way that everything is starting to look the same. [The Cultural Tutor]

+Almost everyone works from home — if they can. "American workers really, really want pandemic-era work flexibility to stick around...87% of workers who can work remotely do so, at least one day a week." [Axios]

+Who's in Your Wallet? A visual essay about the famous figures who represent today’s currencies around the world. [The Pudding]

+Ancient Earth. A neat visualisation of Earth’s continental shifts over the past 750 million years. Use your arrow keys to see the changes over time. The main site is worth a visit in its own right. [Dinosaur Pictures]

Happy weekend.