We are in a 'regime shift' thanks to interest rates and inflation, which means investors and advisers need to consider what this means for portfolios.
This was the view of Dan Brocklebank, head of Orbis UK, which he shared to a packed room at the Ninety-One global investment conference in London.
Speaking to a gathering of advisers, most of whom were from South Africa, Brocklebank said the "brutal" year that was 2022 marked the start of a regime shift.
"On top of the war in Ukraine we saw an inflation shock around the world", he said. "Most people suffered a real-terms pay decrease and central banks were left with few options and very little credibility.
"As a result, both sides of the 60/40 portfolio had a bad year."
But with the series of rate rises, and 2023 starting off like a "car crash with banks in crisis", he said it was likely that stock market leadership could soon change.
He said: "Today we feel we have a little bit of calm but market averages are being driven by a narrow group of stocks. This could be a problem.
"History tells us about regime shifts, such as the Japan bubble and the TMT bubble. Market leadership changes with each new regime.
"With the interest rate and interest rate environment being as they are, and given global politics, it is likely we are going into a regime change.
"History suggests we see a leadership change in terms of those leading the market."
In terms of what this means for investors, he said there were three main considerations for advisers. These are:
- Valuations
- Behaviour
- Correlations.
What it means for valuations
Brocklebank said: "We’re all familiar thinking about bull and bear cycles - but when you dive into things and understand what goes on beneath the surface, there’s more to market movements than that.
"Right now, we need to think about the valuation cycle. Valuation gaps are widening as asset prices rise off the back of loose money.
"Also, the economy and the stock market are much more interlinked than people realise."
While too much capital has been chasing the "really sexy side of the market" and too little has been going after the boring side of the market, this has also led to underinvestment.
"This leads to capacity shortages, which leads to price rises, which leads to inflation - and then you see tightening happening, asset prices falling and valuation gaps closing."
Yet in this situation, he said, referring to Warren Buffett's analogy of seeing who has been swimming naked once the tide goes out, there is opportunity to pick long-term, sustainable investments.
Behaviour
Behaviourally, as far as we can tell, investors are behaving a bit more like a deer in the headlights, he said.
This can lead to some doing nothing.
