The focus many investors had on technology and other early stage companies and ESG investing meant there was a lack of capital available for areas such as commodities.
This has helped to stoke the present very high levels of inflation in the economy, but also represents an opportunity for investors, according to David Jane, who runs a range of multi-asset funds at Premier Miton.
While inflation has hurt the returns achieved by most parts of the equity markets over the past year, commodity prices have risen sharply.
Jane said this is, at least in part, the consequence of underinvestment in the sector over the past decade.
He said: “As in every cycle, there will be some spectacular blow ups and some of the candidates are becoming evident. Asset classes that collapse are generally the ones which are subject to the most leverage as this leads to forced selling once the direction turns down. Two obvious candidates are the crypto-sphere and the private equity arena.”
Jane added that the recent crash in prices of crypto assets will have a direct impact on the wider economy as people have lost money.
He said: “The apparent value in crypto has been leveraged to invest in other areas and the wealth effect from this bubble will have partly driven consumption. Another area of obvious malinvestment, which is also now beginning to unravel, is the private equity and public growth stock arena where huge valuations have been placed on businesses with little revenue, let alone profit.
“This is a feature of most recent market cycles but has been at least as extreme in the current one as the tech bubble in 2000.”
He added: “Again, the knock-on effect on the wider market is the same, driving down the prices of what can be sold as well as what should be sold. There is a counterpoint to the malinvestment caused by the overexuberance of recent years. This is the underinvestment in the core building blocks of the real economy.
“This includes areas such as energy, mining and basic infrastructure, which explains why productivity growth has been so poor. These have been starved of capital as money crowded into the more fashionable arenas. Indeed, ESG concerns often led to the active discouragement of the necessary investment.
“Demand for such products may fall if the economy falls into recession, although to a much lower degree than more discretionary items. However, returns in these areas will likely remain high over the coming years, until supply catches up with demand.”
Jane said that while he has exposure in the funds he jointly runs to sectors such as commodities, overall he remains “highly cautious” right now, and says “ While our preferred areas of energy, consumer staples and materials continue to do relatively well, we maintain a conservative overall equity position and a very defensive bond positioning. “