Global investors are increasingly favouring businesses with localised supply chains in response to geopolitical uncertainty and inflation, according to the Schroders Institutional Investor Study for 2023.
Schroder’s annual survey of 770 investors in 36 regions with nearly 35 trillion dollars in assets is regarded as a barometer of the investment appetite across the globe. The London-based firm itself manages and administers over 570 billion euro on behalf of institutional and retail investors, financial institutions and high net worth clients from around the world.
Investors surveyed believe that developed market equities (32 percent) and private equity, particularly infrastructure (24 percent), present the best opportunities for the coming years as they adjust their strategies to brace for continued global instability and “capture opportunities presented by globalisation,” the report found.
The appeal of localised supply chains was recently also highlighted by other asset managers. Edinburgh-based Baillie Gifford drew attention to the relative strength of Mexico as an emerging market, benefiting from US firms that are reshoring production from China closer to the border with their home market.
Schroders said it believes investors are right to exercise caution, but should also view this disruptive environment not as merely a temporary phase but as “the emergence of a new era altogether”.
Confidence taking a knock
“This year’s study shows that investors have grown less certain,” said Nils Rode, chief investment officer at Schroders Capital, when presenting the study. “Confidence levels have taken a knock from unstable, unpredictable geopolitics, and the delicate task facing central banks of cooling inflation without unwanted side-effects.”
Within the next two years, the report highlights that one third of respondents plan to increase their allocations to private assets. Private assets offer a more profound source of diversification, two thirds of the participants remarked, suggesting that this shift is both a reaction to current economic uncertainties and an optimistic outlook on the energy transition and impact investing trends.
“Many investors continue to be drawn to private assets as a means to engage with the evolving macroeconomic landscape, as well as to add resilience to portfolios,” Rode said. “Private equity, private lending and real assets – both infrastructure and real estate – were the areas investors said they were most likely to add to in the coming year and beyond.”
Impact focus
On the renewable energy front, the Schroders study brought more optimism. Around half of global investors expressed confidence in infrastructure and renewables to seize medium-term investment opportunities presented by decarbonisation.
“Institutional investors are increasingly focused on the thematic exposures and impacts of their investments,” said Andy Howard, global head of sustainable investment at Schroders. “This implies clients want to take a more nuanced approach to sustainable investing than in the past.”
‘3D Reset’
A Schroders report in August attempted to come to grips with global changes in a report titled “The 3D Reset; the world’s disruptive return to the old normal”. 3D stands for the three Ds of decarbonisation, demographics and deglobalisation. Taken together, these are reshaping the investment landscape, the firm said.
Changing demographics mean there will be fewer workers which keeps labour supply tight and will supercharge productivity-boosting technology, Schroders said. The response to climate change will accelerate the energy transition, while the firm believes businesses see more resilient supply chains to bring their manufacturing and infrastructure closer to home markets.