The Book for 2024: A Preliminary Language for a Post-Global World

Hello, this is Inigo Fraser Jenkins from AllianceBernstein. In this video, I wanted to discuss the key conclusions from our book A Preliminary Language for a Post-Global World. The book sets out a narrative that starts with the strategic investment outlook and then discusses what that means for capital markets. Finally, we show what changes are needed to strategic asset allocation and the way that people invest.

We make the case that investors face a new regime. This phrase is perhaps overused, but what we mean by it specifically is that the next 10 years for investors seem set to be very different from the period from 1980 to 2020.

The three mega forces of deglobalization, demographics and climate change seem set to act in concert to raise the equilibrium level of inflation and lower real growth. Deglobalization is unambiguously inflationary, as it fragments supply chains and labor markets. A shrinking working-age population, other things equal, reduces growth rates. Climate change increases the dispersion of possible growth outcomes. Moreover, the need to fund an energy transition implies a period of higher costs, at least until new generating capacity and grid infrastructure is installed.

The one force that potentially points in the opposite direction is artificial intelligence, or AI. We think it is not possible at this stage to quantify the potential for AI to raise productivity. Instead, we show that AI would have to generate a pickup in aggregate productivity of 1.5% per annum to offset the other downward forces on growth. Changes of that magnitude have happened before, but that is at the top end of the historical range.

The bottom line is that this points to a higher-inflation and lower-growth world. This has significant impacts on capital-market assumptions, effectively reducing the return/risk space available to investors. The real return of risk assets falls because of lower growth, relatively high multiples and higher inflation. Meanwhile, the volatility of fixed income likely increases as it returns to a more normal level, as opposed to the suppressed volatility of the QE era.

We stress this is not bearish, as real returns can be positive. However, this prospect raises profound questions for strategic asset allocation and governance of investment portfolios.

This sets up a tension between two different definitions of risk: the risk of a loss of purchasing power versus risk measured as the volatility of a portfolio. For most investment activity, the preservation of purchasing power is ultimately the more important objective.

We suggest that for many investors, inflation should play a greater role in setting the benchmark. The implication is that portfolio risk may have to rise. Fortunately, investors have a number of choices of how to take that risk—for example, greater equity exposure, factor risk, active management, illiquidity and others.

We discuss the role of private assets as one response to this. For many investors, the allocation to private assets should increase. This is in part driven by investor demand, i.e., the need for returns and diversification. Equally important, though, is supply. A shift is taking place in capital provision in the economy, with private assets forming a larger share. We do think that the marginal allocation to private assets from here will favor private debt rather than private equity. For the latter, we think future returns will disappoint.

The book ends with our view on strategic asset allocation. The more constrained outlook and need to potentially increase risk levels mean it is advantageous to think about allocation to asset classes, factors and active returns on the same basis. We offer thoughts on how, in practice, to create an allocation in this way and how the phrasing of constraints affects this.

As the recent cyclical inflationary episode recedes, we think that investors will put more focus on the forces that seem set to shape the strategic outlook. These will, we think, result in a change to strategic asset allocation.

Thank you for your time.