Investment Strategy Group

JBWere’s CIO View: Checking in on the regime change thesis

Sally Auld, Chief Investment Officer, JBWere

In August last year, we penned a note outlining why we thought investment markets and the global economy were at the very beginning of a multi-decade regime change. This week, we check in on that thesis, and conclude that developments across geo-politics, markets and macro over the past year or so have been supportive of the notion of regime change. We find plenty of evidence points to suggest that regime change is well underway, but only limited evidence that this thesis is fully reflected in all asset prices.

Important Notice: This content has been published on the website on 22 November 2023 and reflects our view at the time of publishing, however views and commentary may change after this date. This document has been authorised for distribution in Australia and New Zealand only. It may not be reproduced, adapted, transmitted, distributed or reproduced in any form by any process without the written consent of JBWere Limited. For more information, visit jbwere.com.au or contact a JBWere adviser today.

Advice contained in this article comprises general financial advice only and has been prepared without considering your objectives, financial situations or needs. Before acting on any advice contained in this article, you should consider whether the advice is appropriate for your circumstances. 

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Key Points:

• Regime changes tend to occur every 30-40 years. Our contention is that the last regime – characterised by free trade, the unencumbered movement of capital and labour across borders and a commitment to free market policies – ended in 2016. Thus we find ourselves in the early days of a new regime which in our view, will have significant consequences for investment strategy and portfolio construction.
• Perhaps the most striking evidence of regime change of late is to be found in the realm of geo-politics. Aside from an increased frequency of military conflict across the globe in recent years, we think the most important development in the past year has been the commitment by many countries to the notion of “geonomics”. An extreme interpretation would be that this approach subordinates markets (or the free movement of capital and labour) to the interests of geo-political competition and strategy.
• In Australia, the interplay between strategic alliances and economic policy has been reflected in proposed legislation that effectively creates a military free trade zone between AUKUS countries. The key point for investors is that it is no longer sensible nor possible to separate the geo-political from the economic. 
• In the markets and macro space, we observe higher realised volatility in some economic variables and in many financial asset prices (particularly in fixed income). This is consistent with the new regime we envisage, but also has significant implications for asset prices. If there is more underlying volatility in returns in an asset class, then expected returns need to adjust in order to keep risk-adjusted returns constant. We know that the main driver of expected returns is current valuations, so all else equal, higher realised volatility will imply less favourable valuations for most asset classes. For now, we think prices across fixed income and in some real assets reflect this valuation re-assessment. Other asset classes remain a work in progress.

For more information contact a JBWere adviser today.