Despite persistent inflation, co-chief investment officers at investment manager Ninety One Ltd. say a larger market restructuring is still underway.
According to the Consumer Price Index released on Wednesday, inflation increased to 4.2% in May from 3.8% in April. But Werner Gey van Pittius, co-CIO of fixed income at Ninety One, says inflation rates have not been affected as much by the Iran War as they were in 2022, when Russia invaded Ukraine.
“Now it is a much more modest increase of inflation before the Iran War. … It’s not polluted inflation expectations,” van Pittius says, adding that current rates have not doubled as they did in 2022.
In looking to the past, Ninety One’s leaders find current investment trends similar to those prior to the Global Financial Crisis of 2008 and 2009.
“That investment savings shift happened post-GFC and has now shifted back, and I think we’re very much in a sort of pre-2006-type world from an interest-rate perspective,” says Ninety One’s other co-CIO of fixed income, Peter Kent. “For emerging markets, you also need to go back to a sort of pre-2006-world where we traded very tight to Treasury.”
Unlike the pre-2006 era, mass capital is flowing into energy transition, defense and artificial intelligence, according to Kent.
IPO Buzz, Valuation Challenges
As markets prepare for a series of closely watched “mega-IPOs” tied to the three largest artificial intelligence companies—SpaceX, Open AI and Anthropic—the IPOs present unique risks, particularly for long-term investors.
Since many of these companies are growing rapidly but reinvesting heavily, traditional valuation methods do not apply, and cash flows are difficult to predict.
“It’s just this sheer rapid pace of these companies growing,” says Rhynhardt Roodt, Ninety One’s co-CIO of equities. “It is very hard to estimate how fast they’re going to grow, how far out, whether it’s compounding at 100%—which is what they’re currently doing—[or] compounding at 50%. Your forecast era is huge.”
Near-term trading dynamics may also be driven more by sentiment than by fundamentals. Historical data show that the median IPO underperforms in its first year, according to Roodt, often following strong initial demand driven by retail participation and market momentum.
“In the near term, these [trading dynamics] are going to be driven by fear, greed speculation, leverage, market structure and price discovery,” Roodt says. “These are high-growth, super-high-innovation, quite complex businesses.”
Advisers do not necessarily need to avoid IPOs altogether, but Roodt says they should approach them with caution and context.
“It could be a risk or an opportunity,” he says. “Because there’s such a rapidly evolving space … it feels like a time in the market where one needs to hold your views quite lightly. Professional investors … are trained or schooled in a certain way, but the rules of the game [are] changing.”
Emerging Markets Gain Ground
In contrast, emerging markets are increasingly presenting a more stable—and, in some cases, overlooked—opportunity set, particularly in fixed income.
Pittius points to emerging market central banks’ long-standing experience managing inflation. Unlike developed markets, which were slower to respond to post-pandemic price pressures, many emerging markets began raising rates as early as 2021.
Additionally, emerging markets tend to benefit from periods of strong nominal growth, currently being driven by both economic expansion and elevated inflation.
“EM [emerging markets] is ultimately a cyclical asset class,” says Kent, while explaining how the markets generally do well where there is nominal growth, much like current markets.
Emerging markets are playing an increasingly important role in portfolio construction, according to Kent, particularly as traditional diversification tools become less reliable.
In recent years, markets have faced more supply-driven shocks, such as COVID-19, geopolitical conflicts and trade disruptions, rather than demand-driven downturns.
In these scenarios, “your traditional hedges don’t always work anymore,” Kent says. “We’ve seen environments where both stocks and bonds sell off together.”
At the same time, emerging markets may warrant greater consideration as part of a diversified fixed-income allocation, particularly in an environment defined by continued inflation and geopolitical uncertainty.
“I don’t think we’ve quite solved what this sort of dream portfolio construction is for a supply shock world, and … I think these supply shocks are here to stay,” says Kent. “But what is interesting is EM is behaving better than you would expect through these things.”