Five investment playbook shifts worth watching

A year ago, delegates at an investment conference might reasonably have tried some scenario planning for the year ahead. A tariff war drags on. Oil trades above $100 a barrel. The United States finds itself at war with Iran while threatening to annex Greenland. Consumer confidence at a multi-decade low. Offered that scenario, most of us would have priced in a torrid year for risk assets. Instead, the S&P 500 sits near record highs and the VIX near multi-year lows. Making forecasts, especially about the future, is a humbling exercise!

Howard Marks, the billionaire co-founder of Oaktree Capital Management, put it best: you can't predict, but you can prepare. Accept randomness. Build resilience. Control behaviour. I want to walk through five structural shifts worth watching, while admitting what we do not know, and for each, ask the question that matters most: so, what?

Starting with interest rates, because everything else is priced off them. The incoming Fed chair, Kevin Warsh, has a genuinely tough job. The president who appointed him wants lower rates, yet he is up against inflation that has been stubbornly above target for 60 consecutive months. Meanwhile, US debt has doubled to $39 trillion in a decade, with the US now spending more on interest than defence and education combined. Dissent on the Federal Open Market Committee is running at levels last seen more than 30 years ago, and the bond market, which Scott Galloway calls the “ultimate adult in the room”, is sending its own signal: the 30-year Treasury yield sits at its highest level since 2007. So what? If rates stay higher for longer, it will inevitably have a knock-on-impact on assets - especially growth assets with long-dated cash flows and for those corporates with highly leveraged balance sheets. We are already seeing the impact in both the private equity and credit markets.

Then there is valuation. Warren Buffett and his successor, Greg Abel, are sitting on close to $400 billion in cash, and their view of current equity levels and lack of bargains is hard to miss. Several relative valuations also sit at multi-decade extremes, and we are effectively operating in two markets: AI and almost everything else. The top 10 US stocks now make up roughly 40% of the index, the top 5 stocks now make up 40% of the emerging market index and the top 2 stocks in Korea more than 50%. Markets are priced for one scenario, but price and diversification still matter.

Geopolitics has changed too, playing out now in real time on social media rather than through the diplomatic channels investors grew up trusting. Behind the noise sits a slower shift: countries are investing to become less dependent on one another, in energy, defence, and technology. As BlackRock's Larry Fink puts it, wherever he travels he hears some version of the same thing - countries are looking to become self-reliant. However, self-reliance is expensive, and the massive transition cannot be funded by bank balance sheets alone, which shifts the burden of funding to capital markets and the asset management industry. A less globalised, less interlinked world than most of us are used to is both inflationary and heightens the risk of conflict.

Demographics is the quieter force, and potentially the more durable one. Birth rates now sit below the replacement ratio of 2.1 in two out of every three countries, falling faster than expected, and linked to various factors such as fertility rates, socio-economic issues, a reduction in home ownership and the introduction of smartphones – the latter leading to a decline in face-to-face socialisation among the young. The demographic dividend that supported growth for decades is turning into a headwind, for the first time in the US and China and worsening in Western Europe and Japan.

Sitting alongside this is a truth worth stating plainly: since 1990, a single dollar invested in the stock market has grown roughly 15 times faster than a dollar tied to wages. The winners in that arithmetic are older, wealthier asset owners, which comes at the expense of younger individuals without asset bases. This increases inequality as well as the risk of populism and civil unrest.

Another product of this, particularly among young men, is a scramble for speculative shortcuts: crypto, prediction markets, sports betting.

No conversation about a changing playbook is complete without artificial intelligence (AI). The honest answer to most questions about AI remains "no one knows." But there are some things we do know. Capital expenditure among the largest technology companies has gone from under $100 billion to more than $700 billion in three years, and data centre construction in the US now exceeds office construction.

On the other side of AI capex explosion is the question of where the return on this massive investment will come from. The reality is that large language models have low-switching costs - moving from ChatGPT to Anthropic’s Claude causes almost no friction and most US start-ups use DeepSeek because it is materially cheaper than alternatives. We are already seeing several companies reining in their AI token spend - Uber blew through its annual AI budget by April, Shopify reported the negative impact on its margins and Microsoft pulled back on its internal Claude licences. Corporates will only spend heavily on AI if they are confident they will generate an adequate return on that spending - this can either be significant efficiency gains (less labour) or the more appealing “abundance theory” of increased productivity, innovation and economic growth. The jury is out.

The asset management industry also faces several changes. Most of last year's revenue growth came from markets doing the work rather than from new client flows, and the industry continues to experience fee and cost pressure. There has also been large growth in the alternatives market but there are some warning signs - especially around how some of these products have been sold within the retail market and the risks around liquidity. This year we have seen several of the largest US and European private credit and equity funds unable to meet fund redemptions. The truth is uncompromising: it is impossible to make something that is inherently illiquid, liquid. And the absence of daily price movement should never be mistaken for the absence of risk. These products have a place but need to be sold responsibly.

Cerulli projects a $124 trillion generational wealth transfer by 2048, which matters because the next generation think differently about money, investing and advice, are exposed to a wider range of asset classes, more concerned about sustainability, more willing to rely on AI or social media for financial advice - but still require behavioural coaching every bit as much as the generations before them.

The range of outcomes is wider than it has been in years, and markets are pricing in a narrow set of assumptions that were shaped by the old playbook that is now being tested. This means that behaviour and discipline matter more than ever and to reiterate the words of Howard Marks, “You can't predict, but you can prepare.”

*All facts and figures used in this article are based on data available at the time of publication and subject to change.