Panel
Institutional Investors: Thriving Amid Change
Milken InstituteLisa Gray, Raphael Arndt, Russell Read, Dilhan Pillay Sandrasegara, Tokihiko Shimizu
- Competition for high-quality assets is expected to remain intense with high liquidity and leverage costs for the next six to 12 months, despite potential tapering and increased competition from family offices and permanent capital vehicles.
- Asset prices face a deterioration in the short term and a "pretty bad outlook" in the long term as liquidity withdraws via economic growth or Fed balance sheet shrinking, potentially creating an environment where equities are risky and bonds are unattractive.
- Strategies are shifting away from growth and leverage dependence toward defensive positions, absolute returns, and early-stage venture capital, with a predicted reduction in private asset portfolios and a rotation into "true turn around" or "create and sell" models due to potentially negative illiquidity premiums.
- Economic growth assumptions are being re-evaluated, with expectations of less available growth driven by aging populations and fertility declines, necessitating a focus on assets independent of these variables, particularly as pension systems face immense pressure in Asia.
- Demographic shifts project the population share of South Asia through Africa to rise from 44% to 56% of the global total by 2050, with their GDP and market capitalization expected to grow significantly faster than OECD rates, currently sitting at 6% and 2% respectively.
- Consumer class expansion in Africa and South Asia is identified as a major long-term theme, citing a current African consumer base of 300 million consuming $1 trillion, while the US workforce shifts toward millennials and Gen Z who will comprise over half the population within 10 years.
- Investment models are evolving toward partnership-driven approaches to access high-growth regions like Africa, the Middle East, and South Asia, including a shift for the Alaska Permanent Fund from annual dividends to an endowment model and the Future Fund's move toward shorter-term strategies.
- Japanese market valuations are expected to normalize as domestic company efficiency and ROE rise to match US standards, potentially lowering the perceived high price multiples where 10x may become justified by management improvements.
- Disruptive technologies including deep learning, blockchain, and high-performance computing are predicted to have a significant impact on blue-chip companies, requiring combined strategies for private equity, growth equity, and technology to manage Industry 4.0 disruption.
- Ownership of big data and the resolution of social issues like AI governance and data leakage are anticipated to become major global investment themes over the next 50 years, influencing strategies beyond the next 10 to 15 years.
- Risks include rising nationalism potentially hindering sovereign wealth fund deployment, US trade barriers worsening compared to the past, and the difficulty economies face in creating jobs for workers displaced by automation and rapid technological change.
- China's working-age population is projected to rise from 200 million to half a billion over 25 to 30 years, requiring fundamental societal equilibrium shifts, while the Chinese government is expected to continue attracting foreign capital through currency fixes and market access improvements.
- Flexibility and cash are forecast to hold higher option value than in the past due to increased volatility and regime shifts, while innovation is expected to increasingly occur in one location like the US while deployment scales in emerging markets such as alternative energy.