Market View

What do we mean by regime shift?

Over the past sixty years, we have seen the favour of certain stocks come and go. Rohit Ahluwalia, Head of International Investment Solutions, takes a look back through history at the patterns that have emerged and what the future may hold. 

Rohit Ahluwalia
Financial screen and graph

In the 1960s, during a period when commodity prices and interest rates were low, the "Nifty Fifty" stocks emerged. These were a group of growth stocks that were the bulletproof leaders at the time, and investors were happy to pay exorbitantly high multiples for them. Nothing could go wrong with these stocks… sound familiar?

The Nifty Fifty growth stocks outperformed until the 1970s when we experienced the opposite scenario: commodity supplies became tight at a time when aggregate demand was strong, resulting in higher levels of inflation. 

Value and commodity stocks were the dominant theme until the 1980s when commodity prices stabilised.

At this stage, financial stocks dominated, benefiting from a combination of financialisaton of the global economy and higher levels of real interest rates.

In the 1990s, after an overabundance of commodity supply, prices pulled back, growth slowed, inflation moderated, and interest rates fell. Eventually, investment capital flocked back into growth stocks, spurred by a new technological innovation known as the internet. This period of exuberance and excess investment led to the Dot Com bubble (, if you're old enough to remember) which popped in the early 2000s.

Following the bursting of the Dot Com bubble, we saw the outperformance of value stocks and hard assets, propelled higher by a booming US housing market and the rise of the "BRICS" nations. Credit was cheap, US housing lending standards were lax, China became a manufacturing powerhouse, and the US dollar weakened. Eventually, even during this period, we encountered excesses as the housing market (and banking system) became rife with speculation and overleverage, while emerging markets reached extremely high valuations at a time when growth rates slowed down. These excesses were cleared out during the Great Financial Crisis, aka GFC.

Post the GFC, in 2010, capital once again shifted towards growth stocks, which lasted for the better part of a decade. 

Rapid developments in mobile technology and internet speeds gave birth to a new breed of corporate juggernauts, including social media, e-commerce, cloud computing, and software-as-a-service companies. As with every other cycle in the past, excesses were fuelled by a combination of the 2020 lockdowns and accommodative fiscal and monetary stimulus. Investors believed the world had permanently changed, and interest rates (and inflation) would remain low forever. Any tech company could IPO at insane valuations, regardless of whether the company made profits or not! 

The ESG movement also drove a rapid shift to renewable technologies, focusing on net zero emissions. Fossil fuels became the pariah, which meant traditional natural resource sectors were starved of capital and investment. This period may have come to an end between 2021 and 2022, as the global economy reopened, and the Russia-Ukraine war, along with the Pandemic, exposed the fragility of global supply chains, sparking inflationary pressures and forcing central banks to aggressively change their policy stance to combat inflation.

If history is any useful guide, we may be heading towards another regime shift. 

As above examples demonstrate, this is expected to take place over multiple years (not months or quarters!). This shift may favour sectors or regions that were ignored during the recent era of low inflation and low interest rates, such as commodity-linked sectors, global ex-US equities and cyclical / industrial stocks. 

With the FANG stocks (of Facebook, Amazon, Netflix and Google) taking centre stage for some ten years (up until 2022), now may be the point that we see a change in leadership. Irrespective of who the leaders of tomorrow’s stock market are, our focus on quality will remain. Our approach to researching the best of breed companies within each region and sector will ensure our client portfolios are appropriately positioned to take advantage of these opportunities. 

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