By Mitesh Sheth, Chief Investment Officer of Multi-Asset, Newton Investment Management

The gains of globalisation are behind us and its’ effects are crumbling all around us. We have become so used to a ‘Goldilocks’ backdrop in which a rising tide of central bank liquidity has lifted all boats, with equities, bonds, credit, property, private equity and pretty much all other assets benefitting.

What if that isn’t how things will be in the future? What if inflation remains elevated at a level much higher than 2% (even if it comes down from where it is now, which it likely will)? After decades of lower for longer, what if interest rates remain higher for longer?

We believe we are in the middle of a regime change. So much so that a lot of what we learnt over the past few decades is no longer helpful for managing money today and in the future. Conditions that had underpinned the disinflationary period of 1980-2020, such as low inflation, excessive liquidity and the global geopolitical balance of power are over. Certainly, today’s macro environment poses risks for investors that have not been seen for the last 40 years. It requires re-examining existing models, assumptions and received wisdom. We are clearly entering a new regime.

We are all aware of how the global pandemic has disrupted critical supply chains, creating vulnerability for western consumers. This may continue to correct over the coming months, but we need to recognise a fragmented system of global trade that restricts its supply chains, is increasingly protectionist and deploys sanctions, and is likely to experience more frequent and profound supply-driven inflation shocks and shortages. We seem to be entering a war-time global economy.

Regime changes are rare, but they do happen. When they do, they tend to have profound implications for financial markets. Many of the maxims, norms and models of the investment management industry were conceived during the aforementioned disinflationary period.

Advisers may want to place less emphasis on cost and a greater focus on value going forward. We are clearly entering a new regime characterised not only by higher interest rates and inflation than many of us have seen in our working lifetimes, but also by greater volatility, given the uncertainties created by government intervention, supply chain problems, climate boundary conditions, growing inter-generational inequalities and the reversing of globalisation.

Strategies upon which success is predicated on low nominal interest rates are likely to struggle in this environment. We believe that many specialised, narrow and restricted mandates that lack flexibility could miss out on the potential benefits of broader asset allocation and exposure to selective alternatives.

Adapting to the new regime

With the benefit of hindsight, it made a lot of sense for advisers to recommend their clients invest in low-cost passive balanced funds when everything was going up. However, it could be much more difficult to achieve positive returns in the next few decades, with passive management at risk of disappointing, particularly in real terms, and it becomes harder to rely on bonds to protect capital, given the rising correlation between them and equities.

Advisers may want to place less emphasis on cost and a greater focus on value going forward. More active strategies, for example, could be better placed to take advantage of the growing divergence between companies, sectors, styles, strategies and countries.

Advisers have an important role in reassuring clients and giving them the courage to stay invested. There are already plenty of large, liquid and scalable markets the industry should be willing to offer at a lower fee for clients, whether that be through actively investing in global large-cap equities, global government bonds, global currencies or global commodities, especially if done quantitatively.

Good quality multi-asset funds that don’t try to forecast a single outlook for the future, but instead build resilience to weather different uncertain market environments could be a valuable long-term investment. There is also an important role for risk-rated funds, which could help clients remain invested with sufficient level of risk on, without attempting to time the market.

It’s natural for clients to feel like a rabbit caught in the headlights in the face of change and this can lead to paralysis. Advisers have an even more important role in reassuring clients and giving them the courage to stay invested, make contributions, take risk and focus on the longer term.

The value of investments can fall. Investors may not get back the amount invested.

For Professional Clients only. This is a financial promotion and is not investment advice. For a full list of risks applicable to these funds, please refer to the Prospectus or other offering documents. Please refer to the fund documents. Go to Any views and opinions are those of the author, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes. For further information visit the BNY Mellon Investment Management website.