Against a heightened Volatile, Uncertain, Complex and Ambiguous (VUCA) macro backdrop, it is crucial that practitioners identify and understand the gaps in markets – including the disconnect between Wall Street and Main Street, equity prices and economic growth, divergence in central bank policies, and valuation discrepancies between private and publicly-traded assets – to reduce the unavoidable dissonance between our own perceptions and market realities and enable us to better understand what lies ahead for economies and investment markets so we can reorient portfolios accordingly. Mind the gap(s)!
The new US administration could upend assumptions about global growth and markets for years to come. President Trump has sweeping latitude to deregulate, raise tariffs, tighten immigration enforcement, appoint the next Federal Reserve Chair, and more, even while changing the trajectory of global geopolitics by reinterpreting or even reversing decades of US policy. Thus far, investors have celebrated the positive agenda items while discounting the negative, but that can only persist for so long. Investors need to prepare their portfolios now for a new investing era.
In a VUCA world, the key to success is to identify when it is sensible to follow the crowd and when it is not. Near- and medium-term gaps in current market narratives and perceptions lead to a simple conclusion - it is time for caution. As an “unconstrained” investor with no one to answer to but myself, my experience suggests three courses of action - take advantage of bouts of strength in the US equity market to reduce exposure to equities; exit corporate debt completely; and, get some cheap exposure to volatility as as tail-risk hedge for all risky assets.
Extraordinary and interrelated developments are unfolding in politics, geopolitics and deep tech innovation. In US politics, the fight is no longer between Left and Right, but between the Washington establishment and President Trump’s team of outsiders, determined to break the system from within. Trump’s disruptive approach will have implications for global markets, as he seeks to place cryptocurrencies at the heart of the financial system, and to strike a grand bargain with China’s President Xi. Many disparate events are underway, and the linkages between them are difficult to comprehend. Investors need to devote time and energy to honing their framework for how to think about and exploit the gaps in markets.
Structural inefficiencies in global small caps, driven by limited analyst coverage, liquidity constraints, and valuation dislocations, create hidden gaps and opportunities for alpha. However, identifying these opportunities is increasingly challenging amid geopolitical uncertainty, market volatility and the sheer size of the universe. Traditional investment models struggle to process the vast data needed to identify market mispricing, but AI and Big Data offer a game-changing edge to cut through the noise. By combining AI, alternative data sets, and human expertise, investors can identify new themes, access untapped markets, and capitalise on market dislocations. Against a macroeconomic backdrop of potential fiscal expansion, easing monetary policy, and a higher tariff environment favouring small caps, these market forces present a compelling opportunity for investors.
The combination of years of low interest rates and reduced risk appetite from banks created the perfect conditions for non-banks to fill the gap in commercial real estate lending markets. But too much of a good thing has led to weaker lending standards, poor governance and reduced risk premiums. As inflation has reemerged, interest rates have risen and asset prices have started to level off and even decline, investor fears could lead to a withdrawal of capital from commercial real estate lending markets creating a new gap – a new opportunity to be greedy when others are fearful.
For the last decade, technology companies have been rallying. Earnings growth in the sector is strong, and expectations for the future are high. With valuations relatively full, as well as noise surrounding the Trump presidency, geopolitics and uncertainty in technological advancements, we must remain vigilant. Quality investing is more than just tech. When investing for the long term, defensive equity growth opportunities – quality companies that provide sustainable growth and stability, even in volatile markets – can fill a defensive gap in portfolios.
Infrastructure is tangible, essential and predictable. As an asset class, it is often favoured by investors due to its consistent returns, lower volatility, low correlation to other asset classes, and inflation linked cashflows. The heightened Volatile, Uncertain, Complex and Ambiguous macro environment, coupled with an unprecedented set of industry and government catalysts, is creating generational tailwinds in sectors such as energy transition, digital infrastructure and the care economy. This confluence of events provides a significant opportunity for investors to enhance risk-adjusted returns of their portfolios, by capitalising on this generational investment opportunity.
Private credit has gained prominence as an asset class, delivering strong returns for both institutional and retail investors. As the sector grows, it faces increasing media scrutiny. Unlike public markets, private markets lack standardised reporting, making a manager’s approach to disclosure an increasingly important consideration for investors. In addition to diversification, fund size, and expertise, investors should seek managers who provide insight into their default rates, analyse and disclose the underlying causes, and outline work out resolution strategies. Minding this ‘gap’ with robust risk management and mitigation through cyclical environments can optimise returns and strengthen investor confidence.
The US (and soon rest of world) hasn’t seen this much demand for power since World War 2. While this introduces investment possibilities for many segments, listed infrastructure is disproportionately well-placed to fill this gap. Most infrastructure investment is capitalising on this, but what flies in the face of convention is a tilt to nuclear energy. Pilloried by many, nuclear energy is staging a comeback in developed markets. Listed infrastructure exposure to US nuclear energy is relatively unrecognised and provides a differentiated investment option. This is just one example of listed infrastructure’s ‘super cycle’ of investment, reinforcing an underestimation of infrastructure’s earnings outlook and growth.
The ASX’s mega-cap banks and resources generated solid returns over the past decade, however they failed to effectively reinvest to secure their next decade of growth and returns. Investors should pivot exposure to the growing number of high quality, mid-cap companies that have reinvested to develop market-leading products with global opportunities and long runways for growth. This group of companies should offer superior returns in 2025 and beyond.
In the face of increased global economic uncertainty, geopolitical risks, and the effects of the Trump Administration’s economic strategies, investors need to balance the need for attractive levels of yield versus the need for downside protection. With the Reserve Bank of Australia (RBA) set to initiate its easing cycle, yields declining worldwide, term deposit rates diminishing, APRA phasing out hybrids, and inflation easing, investors must be mindful of the potential gaps and reassess in their strategies for income generation and the construction of defensive asset portfolios. At current valuations, high quality core bonds offer attractive yields relative to cash, as well as the prospect of higher and less volatile returns than equities over the next five years.
The direct lending asset class and investment opportunity was born out of regulatory changes to bridge the gaps in the financial market. Expanding from US$400bn to over US$1.5tn in 2024, direct lending has become the fastest-growing segment within private credit. Direct lending provides investors the opportunity for premium yields that are often unavailable in the public credit markets. Direct lenders can capture alpha and mitigate downside risk through rigorous diligence process, negotiated terms and pricing, tighter protective covenants, and robust portfolio management. In an era of tight credit spreads, direct lending offers investors high, consistent income and a diversified income stream. Strategically allocating to direct lending can deliver premium yields, enhanced returns, and reduced volatility for investors’ portfolios.
Asset allocators view Emerging Markets separately, attracted by growth and inefficiencies but offset by sovereign risks and poorer governance. Applying the Pareto Principle twice can reduce EM first to Asia and then to four dominant markets - China, India, Korea and Taiwan (“TICK”?!). For Australians, this leaves no gap - non-Asia EM has similar sector mix to home. TICK’s combined profile mirrors the US but adds exposure across the spectrum of development. As investors chased Mag7, a wide valuation gap has opened up. Investors need a fresh growth narrative and must revisit Emerging Markets. TICKing off these four markets is the most efficient starting point for active stockpickers and opportunities abound.
There are two common myths when it comes to SMID cap investing - that they have lower risk adjusted returns and shouldn’t be a strategic asset allocation in portfolios and that they should be concentrated portfolios. But the lower coverage of SMID Caps means greater opportunity to exploit market mispricing relative to large caps.
Public markets dominate the headlines, but the number of listed companies is shrinking while private markets keep expanding. This widening gap means investors risk missing the real opportunity - private equity. In the mid-market, where inefficiencies and hands-on value creation thrive, outsized returns are being captured beyond the public eye. If you’re not allocating to mid-market Australian private equity, you’re not just missing a gap, you’re missing the largest opportunity set in the market.
Multi-asset, multi-manager investing (MAMMI) is not a new concept. The core principles that underpin it go back thousands of years, appearing in various religious texts. MAMMI has evolved over the past 50 years into a highly complex discipline such that nowadays, it represents the true expertise of the investment portfolio construction professional. Understanding the drivers of and outlook for the markets is an essential ingredient to MAMMI expertise, whether you are putting portfolios together or giving advice on them. However, MAMMI is full of traps. As the saying goes “It’s simple, it’s just not easy!”.
Donald Trump is back - and he will reshape and redefine our world. Whatever your view on the 47th American president, Trump will ‘Make Politics Great Again’ in 2025. For investors, Trump’s return may disrupt some of the gaps that have opened up in markets - notably, between long-term bond yields and stock prices, and between US equities and the rest of the world. In a world of extreme abnormality, 2025 will be the year the bond markets flex their vigilante muscles. It will be a fascinating contest between governments, and their enabling central banks, and the ‘free’ capital markets. Indeed, bond markets may be the only force powerful enough to tame the new president. As we progress through the Trumpification of markets, the political and information prism through which we view the world will help us mind the gap(s) between market perception and investing reality.
We reveal and discuss delegates’ views on which high conviction theses they intend to investigate further or implement in practice, in prep for the Implementation Zoominar the following week.
Established in 2002, Strategies Summit is THE portfolio construction strategies conference of the year. Presented each August, the program features 50+ carefully selected leading investment thinkers who will challenge and refresh your portfolio construction thinking by debating contemporary and emerging portfolio construction strategies, for you to consider applying in practice to build better quality portfolios.
Our Markets Summit program kicks off with a video retrospective of the key events of the prior year...
Equity investors should set aside their fears of a second Trump presidency and focus instead on the structural opportunities presented by decarbonisation.
With monetary policy easing set to provide an additional tailwind for smaller companies, now is the time for practitioners to consider increasing global small caps exposure in portfolios.
The 2024 US election result could potentially upend assumptions about global growth and markets in the years ahead. The next four years could be Volatility, Uncertainty, Complexity and Ambiguity (VUCA) on steroids!
The consensus on Wall Street is that the equity market will keep on rising in 2025. But independent economist, Andrew Hunt, thinks differently. He argues that the US corporate sector is highly leveraged and struggling to generate profits, with private credit posing a systemic risk.
Established in 2009, Portfolio Construction Forum Markets Summit is THE investment markets scene setter of the year. It will help you better understand the key drivers of and outlook for the markets, and the opportunities and risks ahead on a three- to five-year view, to aid your search for return and to help them build better quality investor portfolios.