High inflation is leading to a sell-off in bonds and equities which means that the end of globalisation will pose great problems fro the investment management industry.
The first, with respect to emerging markets in general and Russia in particular is that the idea of resilience or institutional quality is important. Russian assets have long traded at a valuation discount to other emerging markets because investors were distrustful of governance there.
In other asset classes, the spike in inflation and the corresponding sell-off in ‘safe’ fixed income is producing a portfolio crisis, the amplitude of which has yet to be fully appreciated. For the past twenty or more years the wealth and asset/investment industries have invested trillions of dollars of client money based on corresponding chunks of equities and government bonds .
First, there will be more downward pressure on fees for investment funds and likely more consolidation across the sector. Some investors believe that the answer lies in private assets, but here again there are several issues. In the developed world and much of Asia, real estate prices are extremely high and will likely not withstand rising interest rates. In the US, with long-term mortgage rates rising to 5%, housing related stocks . My sense is that much of the rest of this year will be dominated by concerns that the housing market has peaked and will ‘roll over’.
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