Alternative Investment Themes for 2022

Alternative investments can enhance portfolio returns given higher return expectations and typically low correlation with traditional assets.

Executive Summary 

Our most recent annual 10-Year Capital Markets Assumptions have highlighted a more challenging return environment and the increasing importance of alternatives within a well-diversified portfolio. Alternative investments can enhance portfolio returns given higher return expectations and typically lower correlation with traditional assets. Recognizing the importance alternatives will play in portfolio construction moving forward, we are launching our Annual Alternatives Investment Themes. This publication is designed to share our perspectives on where some of the most exciting opportunities are within the space.

Themes

Our Alternative Investment Themes aim to connect what is transpiring in the real economy with non-traditional strategies that may be positioned to take advantage of the remarkable post-pandemic economic evolution. The themes can be categorized as secular (those that aim to take advantage of the changes in the composition of economies and how economies operate) and cyclical (those that reflect the macro-economic environment we live in).

Cyclical secular themes chart

Cyclical Themes

  1. Winners & Losers of a Global Economic Recovery

Uneven post-pandemic economic growth patterns, expectations of rising rates and higher inflation will produce clear winners and losers among small and mid-sized businesses, certain real estate sectors and across emerging markets.

  1. Heightened Inflation

Unprecedented government stimulus to restart the economy, supply-side bottlenecks and labor shortages are placing upward pressure on prices and inflation.

  1. Heightened Volatility and Market Dislocations

Volatility in public markets has increased and is expected to remain elevated. Periodic dislocations, often fuelled by decreased liquidity in the public markets, are becoming more common than in the past (e.g., Jan 2016, Dec 2018, Feb 2020), providing more frequent and attractive entry points for opportunistic investors.

  1. Low-Rate Environment

In a low interest rate environment, we expect fixed income returns will be limited where interest payments may offset principal loss due to a rise in interest rates.

Secular Themes

  1. Structural Changes in the Equity Markets

The structure of equity markets has been evolving for over a decade, providing support for private equity and venture capital (VC) investment.

  1. Responsible and Impact Investing

Responsible and Impact Investing strategies are growing components of client portfolios. Environmental, social and governance (ESG) is no longer an undercurrent of investing, but a standalone theme.

  1. Innovation

The pandemic has accelerated trends in technology innovation and resulting shifts in consumer behavior are creating clear winners in the marketplace. Consumers are adopting new technologies faster, making investments in technology highly attractive to investors.

  1. Global to Local Shift

Shifts toward domestic consumption and the regionalization of supply chains have been transpiring for some time, further fueled by the Covid-19 pandemic and escalating trade tensions across the world.

  1. The New Geopolitical Equilibrium

The role of state and government vs. individualistic culture will continue to shape the geopolitical landscape in a post-pandemic world.

To learn about alternative strategies that are positioned to benefit from these nine themes, please read our full report.

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