TradeTech: Opportunity for European asset managers as US investment strategy shifts

US investors are looking to diversify both geographically and in terms of asset class, reveals TradeTech panel, while inflation and climate change remain a key issue for asset managers in 2022.

At the Economic Fireside Chat at TradeTech in Paris this morning, a panel of leading economists, researchers and practitioners discussed how the coronavirus pandemic has impacted global economic activity and what this could mean from both a balance sheet and fund flow perspective.

Interest rate volatility

Crucially, of course, one of the key issues of the year going forward will be the significant rise in inflation, and how central banks can handle that.

“There has been a huge rise in commodity prices – oil prices, gas prices, wheat prices given the situation in Ukraine,” said Kevin Daly, senior economist at Goldman Sachs. “Growth is holding up better than we expected, but everyone is trying to deal with this massive inflationary dynamic that was already there before the war but has been significantly exacerbated.

“Central banks have a ready-made toolkit in the form of interest rates to deal with inflation. But will they be able to walk the tightrope between slowing growth enough to reduce inflation, but not slow it so much to push the economy into recession. That’s a very thin path with a lot of places to fall off.”

US opportunity

Jane Buchan, CEO of Martlet Asset Management and a veteran hedge fund practitioner, highlighted a crucial opportunity for European asset managers as US investors start to look outside their domestic focus for the first time in a while.

“In the States we’ve had a really rough start to the year,” said Buchan. “It’s previously been a market where you’ve been rewarded for being in the US – lots of investors have thought, why put our money overseas when the domestic market is doing so well? So what’s happening now is a small-scale panic in the institutional asset management market. Should we be more diversified, should we be looking overseas? They’re also exploring different asset classes that maybe they didn’t look at before. Trading rates and currencies, commodities, have all been put to the side in recent years, and people are now re-evaluating that. We are seeing a movement from the big US investment managers, who are looking at changing what they want to do.”

One of these trends is a move to equities, given the current freefall in the fixed income market. “In the US we’ve had a bull run in bonds. As people see those values decline, we may see a re-allocation to equities,” predicted Buchan.

“US institutional investors will look outside the US more than they have in the past five years, and that’s a strong message for European asset managers.”

Climate change focus

Finally, Dirk Schumacher, managing director and head of European macro research at Natixis, stressed the crucial importance of climate change as an impact that investment managers must consider over the coming years.

“Climate change is for real and we need to spend a lot of money on addressing it,” he told the conference. “There will be mistakes made along the way. There will be structural breaks, there will be sectors that won’t adapt, energy prices will stay high. This is all difficult to model, but the green transition is here to stay, and the amounts spent will be huge.

Adjusting for opportunity

Looking ahead, it’s likely that the world will end up looking like a rather different place in the next few years, and strategies will have to adapt to accommodate that.

“Where do we end up once all these shocks have been absorbed?” asked Schumacher. “The neutral rate is likely to end up higher than it was before.”

Daly agreed. “The question is – when will we see the peak in US inflation? That is going to be the next big thing the market has to deal with. You’ll have to decide what trades you want to be putting on in that environment.

“I’m not sure we’ll want long-only equities. You might want to be taking off your US fixed income shorts. We’re seeing initial evidence that the peak could be coming round the corner in the next couple of months. The challenge will be how the market responds to it.”