Old lessons, new market realities
For decades, investors could rely on a familiar playbook. Today, that playbook is being tested. Old lessons still matter, but Investment Executive LINDA EEDES writes that new realities are reshaping where returns may come from in the years ahead.
Lesson 1: The trend is your friend
New reality: Complacency is costly
For much of the past 15 years, momentum has worked. Buying what was rising, and staying fully invested, was rewarded. But markets now look unusually complacent. Geopolitical tensions are elevated, debt levels are high and stress is visible in parts of the private credit market, yet asset prices remain rich and risk premia thin.
The lesson is not to abandon equities, but to avoid blind momentum. Capital needs to be allocated selectively to where risk is being properly rewarded. Holding cash in portfolios as dry powder also provides protection and flexibility when conditions change.
Lesson 2: Inflation hurts governments
New reality: Inflation may help governments
Historically, governments treated inflation as something to be defeated. But with debt burdens now exceptionally high, inflation may increasingly become part of the solution. Higher inflation erodes the real value of debt and eases fiscal pressure, even if it makes consumers poorer.
Japan has, in recent years, shown how higher inflation, combined with currency weakness, can help stabilise government debt levels. For investors, that changes the playbook. Assets that help preserve real returns — gold, commodities, infrastructure, utilities and inflation-linked bonds — become more important.
Lesson 3: Demographics drive growth
New reality: Technology can offset demographics
It has long been understood that population growth underpins economic growth. Technology, especially artificial intelligence, may weaken that link. AI is increasingly able to perform complex tasks, lift productivity and reduce reliance on labour.
At the same time, political resistance to immigration is rising across developed markets. The implication is clear: future economic growth may depend less on demographics and more on technological innovation. That shifts the focus towards economies and companies at the frontier of innovation, most notably the US and China.
Lesson 4: US assets anchor portfolios
New reality: US exceptionalism may be a poor strategy
US assets have dominated global portfolios for more than a decade, reinforcing the belief that they should remain the core allocation indefinitely. However, history suggests otherwise — market leadership is cyclical, not permanent.
US valuations remain elevated, while opportunities are emerging in Europe, China and broader emerging markets. Central banks are adjusting too, increasing gold holdings and reducing reliance on US Treasuries. For investors, the case for broader diversification — across geographies and currencies — is strengthening.
Lesson 5: Local issues drive local returns
New reality: Global forces drive local returns
South African investors often focus on domestic policy and reform. Those matter, but recent returns have been shaped more by global forces than by local ones. Commodity prices and capital flows have done more to drive South African asset performance than any meaningful acceleration in local growth.
That is a useful reminder to look beyond the domestic narrative. Investors should prioritise businesses with strong, independent earnings drivers, rather than assuming that favourable external conditions will last.
Positioning for the new reality
So where should investors look for returns?
Inflation protection — gold, commodities, utilities and inflation-linked bonds
Global diversification — increasing allocations outside the US
Selective equities — quality businesses with strong independent drivers and attractive valuations
Liquidity — holding cash to take advantage of volatility.
Above all, this is no time for complacency. The world is changing quickly as well as structurally. Old assumptions are being tested, and past trends are no longer enough. As the old saying goes, it is better to be roughly right than precisely wrong. In today’s environment, that means building resilient, diversified portfolios that can adapt as new realities unfold.