Investments: Bringing the 2020s into Focus | Lord Abbett
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Institutional Perspectives

Lord Abbett experts review the trends that influenced the past decade for economies and markets—and may influence the next.

 

In Brief

  • At the dawn of a new decade, we asked Lord Abbett investment professionals to look back—and forward—at global economies and markets.
  • Among the factors that influenced the 2010s were global monetary easing, technology, and the lingering after-effects of the 2008–09 financial crisis.
  • One major macro factor that could influence the next 10 years: the continued rise of China as an economic power. Our experts also identified credit and innovation growth equities as investment categories to watch.

 

The 2010s were a chaotic, tumultuous, and ultimately profitable, time for many investors. How should we think about the next 10 years?

The past decade began with “animal spirits left for dead by the [2008–09] financial crisis” but was poised to finish with “stocks near records, volatility vanquished and the credit supercycle on steroids,” according to a Bloomberg report.1 Along the way, there were many remarkable developments in global economies and markets, geopolitics, and technology.

When asked to sum up some of the key themes of the 2010s, Lord Abbett equity trader Nestor Melendez cited “the rise of passive investing, negative-yielding bonds topping out at over $17 trillion, the growth of ESG (environmental, social, and governance) investing, MiFID II and other securities industry regulatory changes, the rise of ‘robo’ advisors and other manifestations of the growing role of technology in the financial sector, and the increasing influence of private equity in financial markets.” Meanwhile, for investors, the global news cycle seemed to be stuck on hyper-speed (see infographic).

 

Source: Bloomberg, U.S. News & World Report, and Lord Abbett.

 

As we noted before, many investors reaped gains from strength in key asset classes during the decade (see Chart 1). U.S. and global equities enjoyed significant returns, while lower-rated securities outperformed in U.S. fixed income. U.S. municipal bonds posted solid returns, with the market strengthening into the close of the decade in response to supply/demand factors and changes to the U.S. tax code.

 

Chart 1. How Did Major Asset Classes Fare in the 2010s?
Average annual returns for the period January 1, 2010­–December 31, 2019

Source: Bloomberg.  Data as of 12/31/2019. Municipal bond returns do not reflect effect of their tax-exempt status for investors in the United States.
U.S. Small Caps=Russell 2000® Index. U.S. Growth=Russell 3000® Growth Index. U.S. Value=Russell 3000® Growth Index. Global Equities=MSCI ACWI (All Country World Index). Emerging Market Bonds= J.P. Morgan Emerging Markets Bond Global Diversified Index. U.S. Aggregate=Bloomberg Barclays U.S. Aggregate Bond Index. Global Aggregate=Bloomberg Barclays Global Aggregate Bond Index. U.S. IG (Investment Grade) Corporates=Bloomberg Barclays U.S. Corporate Bond Index. U.S. High Yield=ICE BofAML U.S. High Yield Index. U.S. Treasury Bills=ICE BofAML U.S. Treasury Bill Index. U.S. Municipal Bonds=Bloomberg Barclays Municipal Bond Index. U.S. High Yield Munis=Bloomberg Barclays High Yield Municipal Bond Index.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

 

For financial markets in general, Lord Abbett investment strategist Tim Paulson characterized the last decade as “one dominated by central bank activity, namely easier monetary policy across the globe, and declining risk premia.” He notes that in fixed income, five-year U.S. Treasury securities were yielding 2.65% to start the decade, and the broad bond-market benchmark Bloomberg Barclays U.S. Aggregate Bond Index (U.S. Aggregate) yielded around 3.60%. “A total return over the following decade of 3.75% might seem a bit disappointing given the strong returns” in other asset classes, and the declining yield environment, Paulson says. But he adds that for investors with longer investment horizons—such as an entire decade—the starting yield of a longer-duration, high grade asset class is likely to be “a very good indicator” of the total return over that time. “Unsurprisingly, indexes with more credit exposure, and thus higher yields, than the U.S. Aggregate—such as U.S. high yield, emerging-market bonds, or U.S. investment-grade corporates—posted higher returns.” 

 

Advisors: Start the new decade off right with updated insights from Lord Abbett investment leaders. Register now for our 2020 Investment Outlook webinar on January 8, 2020

 

For the U.S. equity market, “if there has been a persistent theme over this past decade—amid fears of another U.S. recession, multiple quantitative easings by the U.S. Federal Reserve, ultra-low to negative interest rates, seismic political swings, and still-resilient equity markets—it has been a short-term focus among investors,” says Lord Abbett investment strategist Brian Foerster. He points to trends in U.S. mutual fund and pension asset flows which “illustrate the stark difference in preference for low-volatility, low-return investments and avoidance of more volatile, higher-returning assets.” This, he says, is a likely result of “the extreme loss aversion following the lost decade of 2000-2008 that has kept the average investor tethered to the perceived safety of low-volatility and income-generating assets.”

Conversely, notes Foerster, while hedge funds and high-net-worth investors “happily bought innovation-oriented stocks (for example, technology, ecommerce, and biotech),” U.S. mutual fund investors and U.S. pensions shunned them due to their historical volatility. That stance may have cost them the opportunity to participate in the outsized gains in the U.S. growth category during the decade, as shown in Chart 1.

Investment Considerations for the Next Decade
While it’s useful to reflect on the economic and market trends of the past 10 years, investors must also think about what might influence asset performance in the decade ahead. As a follow-up to our 2020 Investment Outlook roundtable, we asked the Lord Abbett investment leaders who participated in that discussion for their thoughts. (We have previously published decade-ahead views on U.S. municipal bonds from Lord Abbett Partner & Director of Municipal Bonds Dan Solender and global currencies from Lord Abbett Partner & Portfolio Manager Leah Traub.)

Global Economy: The last 10 years constitute the longest U.S. economic expansion on record, notes Lord Abbett Partner & Director of Strategic Asset Allocation Giulio Martini, but also “the feeblest” as measured by GDP and productivity growth. Notwithstanding the absence of a U.S. recession, he adds, it was also the decade when China became the largest contributor to global economic growth even as its economy slowed.

“It was also a decade of low and stable global inflation,” he says. But Martini thinks the next decade could witness inflation becoming destabilized by persistently tight resource markets, especially in the United States. While there is no sign of this happening yet, “the consequences of such a development would be so pervasive that it is a risk that needs to be taken into account.”

“There is little doubt that China’s economy will continue contributing more to global economic growth than any other single country,” says Martini, and that its economy will get closer to overtaking the United States as the world’s largest. “How geopolitics is rearranged as the era of U.S. economic hegemony comes to an end will also be a critical influence shaping opportunities for global investors,” he concludes.

Fixed Income: Paulson expanded on his earlier observations on the past decade’s performance of lower-rated U.S. fixed-income securities, noting the potential benefit of these securities’ higher yield for long-term returns, which “should anchor the outlook” for these investments for the next decade. “While asset classes such as high yield certainly had their bouts of volatility, the perspective of a 10-year horizon reminds us why we encourage investors to think of credit as a long-term holding–because historically, it has simply outperformed several other categories of fixed income.”

U.S. Equities: For the coming decade, Lord Abbett Partner & Portfolio Manager Tom O’Halloran believes that for his specialty area, innovation growth equities, the No. 1 theme “will likely be the ongoing advance of the technology revolution.” Why? He says that “the continued exponential gains in processing power… will, in our view, be a key raw material for new business creation on a wider basis (throughout the U.S. economy), and will enable businesses to scale to a greater degree.” At the same time, O’Halloran believes “efficiencies generated by technology advances “will have a powerful depressing influence on the rate of inflation.”

O’Halloran summarized his view: “The tech revolution has created extraordinary wealth since the microprocessor came on the scene in 1960, with its influence becoming stronger with each passing year.” The “best lies ahead” over the next 10 years for those companies best able to harness the transformative power of technology, he believes, while “those who are on the wrong side of these developments will see the worst.”

Summing Up
Given the firm’s long-term orientation, Lord Abbett’s investment teams are continually examining the potential trends that may shape the investing landscape in the years to come. Of course, Market View will be following these developments closely, and will keep our readers up to date on how they may influence our thinking on economies and major asset classes—and our actively managed investment strategies across global markets.

 

1”The ‘Fire and Ice’ Decade That Changed Everything on Wall Street,” Bloomberg, December 27, 2019.

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