Three factors have combined to create a ‘once in a lifetime’ investment environment that have a “cascade of implications” for asset classes and investments, according to Premier Miton Investors’ Anthony Rayner.
The multi asset manager at Premier Miton said that while the current debate has been centred around growth and value, there are more extreme market conditions at play.
“The current market divergences aren’t confined to these two styles or indeed just to equities, though they are very much related to a single and unique environment,” he said.
While these factors have been accelerated by the impact of Covid-19 restrictions across the world, they are also sustained by the impact of a vaccine and future stimulus packages which has no end date in sight.
“This historically unusual environment has been created by a number of extraordinary forces combining,” said the manager.
He said an extended period of unprecedented monetary policy, the drive for renewable energy and technological innovation are created a unique environment.
While technological advancement is nothing new, the pace of change that the internet has brought is unprecedented and changed the investment landscape.
Rayner said the three forces, while long-term in nature, originate from unrelated sources but complementary ways.
“Low rates help tech start-ups, while technological innovations have helped facilitate game-changing progress in the sphere of renewable energy and the disinflationary impact of technology has helped keep rates low,” said Rayner.
Performance of indices over 1yr
Source: FE Analytics
An example of what the renewable energy movement has meant for financial markets can be seen in the graph above where, considering that the S&P Crude Oil index has made a loss of 64.01 per cent this year, the Nasdaq Clean Edge Green Energy index has returned 125.30 per cent from October 2019.
The multi-asset manager (pictured) noted that the impact of Covid-related lockdowns, help compound this environment in the shorter term, for example, by adding to disinflationary pressures. 
He explained: “Ironically, it might be these very same lockdowns that in the longer term lead to reflationary pressures, in the form of a significant US fiscal package.
“This might well have a green infrastructure dimension, reinforcing one of three pillars of the current environment in the form of renewables, but eroding the low rate environment.”
The impact of this unique environment is not limited to equity and sovereign bond yields remain close to record lows, bringing into question their role as a safe haven in investment portfolios.
“In order to balance equity risk in portfolios, so much duration is needed that it ends up producing a significant duration risk,” said Rayner.
“Cash is no longer perceived as an asset class by many, as it is zero yielding. Though in absolute terms it clearly retains some safe haven attractions, especially as government bonds are somewhat compromised.”
This, Rayner said, has created a “cascade of implications” across asset classes.
He noted: “We’ve seen general preference for growth over value, overseas over UK (old economy), developed over emerging, credit over government bonds (yield compression), gold over US Treasuries (yield compression) and cash over sovereign bonds (duration risk).”
The multi-asset manager added that investors approach these divergences in different ways, to differing degrees of extremity.
“Some value investors rub their hands and are happy to wait for some value to be realised,” he said. “Some roll their eyes and decry the madness of the situation, while pragmatists, like us, get behind those persistent trends in financial markets, where there is some evidential support.”
He concluded that there are still considerable risks, namely rising inflation.
“A key risk is a more reflationary environment, which might see yields and inflation pick up and value start to outperform growth,” said Rayner.
The development and distribution of a vaccine may be a cause of this, or a significant US fiscal package either under the incumbent Donald Trump, or opposing candidate, Joe Biden.
“Timing any switch is crucial,” he finished. “Just observing that a piece of elastic is tight, provides little insight into when it might snap back and furthermore the elastic has been tight for quite a few years now.”