On June 7, 2023, CFA Society Toronto held its Annual Pension Conference, featuring speakers from some of the largest pension funds in Canada. The panellists provided insights on:

• Navigating financial markets in an age of heightened disruptions and uncertainty caused by technological change
• Increased geopolitical risk
• Rising interest rates
• The long-term impacts of the COVID-19 pandemic

In addition to these insights, they spoke about the traditional 60/40 equity portfolio, what institutional investors need to be concerned about, and the general outlook.

A fascinating panel, entitled “Key Portfolio Considerations in Today’s Volatile Times,” featured Anca Drexler, CFA, OMERS; Kevin Zhu, CFA, OPTrust; and moderator June Wang, CFA, RBC Capital Markets, and CFA Society Toronto volunteer, Institutional Asset Management Committee. The panel opened in the spirit of the adage “the only certainty is uncertainty,” emphasizing the volatility of markets since the onset of the COVID-19 pandemic.

Now that the pandemic is mostly behind us (we hope), the panellists discussed investing in a post-pandemic world and the considerations they have while navigating these waters. Anca Drexler commented on the current regime shift, with the future of financial markets being quite different from what we’re used to. This shift is mainly due to the rapid rise in global interest rates to combat soaring inflation. Overall, Drexler is anticipating a shift over the years to come toward lower global growth, higher interest rates, and higher inflation. It is important to be thoughtful and assess how these shifts will impact the broader investment environment and the risks and opportunities that may arise. We are entering an era of constrained resources; the world is getting older, warmer, tenser, less governed, and more closed-in, but, on the plus side, more innovative, which could increase productivity. Drexler expanded on some of these trends, noting that there are six slow-moving trains shaping the future:

1. Geopolitics: While it’s no surprise that geopolitics can affect financial markets, today’s geopolitical factors have been more dramatic than what we have seen in the recent past. Mainly, the US–China conflict, the Ukraine War, and the growing emergence of the Global South, with India, Mexico, Indonesia, and Brazil forming coalitions with other nations. The changes can result in increased military spending and economic decoupling, which could hamper productivity, especially when combined with the factors below. 
2. Globalization: It’s being transformed, and not for the better. The transformation will lead to a less efficient allocation of capital, resulting in rising input costs and higher wages as supply chains focus on resilience rather than productivity. This inward focus, as opposed to an outward one, is influenced largely by an increase in populism. 
3. Populism: The rise of populism began well before the COVID-19 pandemic but has become much more pronounced in other areas of the globe, not just in the West. Emphasizing short-term gains might garner widespread political support, but it might not be conducive to sustained productivity growth. Some potential effects of this are more regional alliances and more regional trade, contributing to the globalization transformation.  
4. Climate Change: Achieving net zero greenhouse gas emissions will require government spending, adding to the already high debt on governments’ balance sheets. This will act as a catalyst for inflation, as more spending adds to debt in the system. In the push for net zero, you can expect to see sanctions and increased taxes for consumers, which will raise input costs—resulting in winners and losers in different countries and sectors.
5. Aging Population: Many of the advantages China has benefited from could be reduced in the future as their workforce ages. China has given the world significant innovation and growth as the country flourished. Now, the population in China is getting older, and the country will have a smaller participating labour force, which will increase global wages, leading to rising input costs globally. It remains to be seen if other countries will be able to supplement the decrease in China’s labour force.
   
6. Innovation: Rapid innovation, particularly in artificial intelligence (AI), could offset some of the abovementioned challenges. AI has many use cases, such as enhanced data analysis and decision-making, predictive maintenance, supply chain optimization, personalized customer experience, and health care and medicine. Hopefully, AI can offset the loss of productivity and increased input costs from the first five “slow-moving trains,” but how it will play out remains to be seen.

Over the past decade, growth rates, interest rates, and public policy served as favourable winds propelling financial markets forward. However, within just one year, these dynamics have transformed into formidable headwinds, presenting a new challenge for investors. Understanding the intricate interplay of these forces and predicting the unfolding global scenario is an insightful exercise in scenario planning. Those who enjoyed remarkable returns through passive index ownership now face a landscape where individual security selection could significantly impact positive returns. This shift underscores the rapidity with which the world and financial markets can change, adding an element of dynamism that makes working in this environment both challenging and gratifying.