Businessmen on ship

Good luck to employers, plan sponsors and financial advisors who are trying to use this year's events to guide their strategy for 2023. "The last 12 months have seen significant upheaval in global markets, with a number of notable events having a profound impact on the world as we know it," according to Mercer's "Investment Themes and Opportunities in 2023 and beyond" report. Matt Scott, strategic research consultant for Mercer, recommends considering what he calls a "real asset" strategy based on potential scenarios. "Look at what is in a portfolio," he said. "How many of the assets in your portfolio will do well if we are entering a new higher-inflation regime that is persistent, like the 70s? What do you have that actually is going to help you there? If it's nothing, then maybe consider real asset allocation. This could include REITs, infrastructure and natural resource equities. We think those investments will endure and provide the potential for low risk if managed sustainably." The report presented three investment themes for investors for 2023 and beyond.

Theme No. 1: History rhyme

History provides important lessons on dealing with resources conflict, weak growth, spiraling inflation and monetary and fiscal tightening. Inflation has been one of the driving themes and concerns for investors over the past 12 months. Even if many believe inflation is beginning to slow, it is unclear how long it will take to return to a level that resembles central bank targets. A number of factors suggest that current inflation challenges are far from over and that inflation risk has increased in the long term. Key takeaways:

  • Although market expectations are for inflation pressures to subside, various factors indicate that further inflation shocks are a threat for the foreseeable future.
  • Natural resource equities could play a useful role as part of a broader inflation regimen- management positioning.
  • The return of positive real yields increases the inflation-protection merits of inflation-linked bonds.

Theme No. 2: Position for transition

Investors are unwavering in their commitment to incorporating sustainability principles to ensure a joined-up transition. Mercer suggests that investors stick to their principles on sustainability but ensure that efforts to "clean" portfolios are aligned with the need to "green the planet." Engagement by asset owners and asset managers with companies will be important.

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"Sustainability investors have focused on quality growth investments in a decade which, until recently, rewarded such an approach," Scott said. "Upstream stocks tend to be messier and to have more of a value bias. Engaging in this area is key for the transition, and investors should not be afraid to get their hands `dirty'."

Key takeaways:

  • The world is in a much better place today to address some of the key challenges it faces, with a much wider range of tools than was the case during similar experiences in the 1970s. For instance, energy transition funds are available that should benefit from regulatory tailwinds and shifts in demand, and there are opportunities in environmental funds.
  • Often overlooked by investors, mining stocks are crucial to the transition and offer an element of inflation protection; in particular, for greenflation.
  • Engagement approaches taken by investors are necessary for future developments in this space.

Theme No. 3: Degrees of freedom

Good governance could help portfolios capture opportunistic investments, deliver dynamic diversification and construct robust portfolios. Investors today arguably have many more tools at their disposal than their predecessors ever did in the 1970s. Private markets have become a major focus in recent times, with asset owners increasingly cognizant of the ability of the space to drive innovation and meet the needs of changing economies. Private markets' product offerings also have reflected this increased demand and popularity. Key takeaways:

  • Exposure to private markets can provide investors with access to greater portions of the global economy than public markets alone. Private markets' role in driving innovation to meet the needs of changing economies can provide attractive opportunities for investors.
  • Portfolio design and product developments have evolved significantly to meet investor needs. Investors have a broad range of opportunities, including secondary, open-ended, evergreen and continuation funds.
  • Investors should maintain their commitment pacing. Committing to private equity during recession years and near subsequent years historically has rewarded investors. In the wake of the recent FTX scandal, tangible assets are attractive to many investors.

"My job is looking at three- to five-year horizons." Scott said. "It's about looking at investments that are more down to earth. Things like crypto are not cutting the ice anymore. There is potential for real asset strategies to fit into this new world a lot better."

Alan Goforth

Alan Goforth is a freelance writer in suburban Kansas City. In addition to freelancing for several publications, he has written a dozen books about sports and other topics.