Raphi Rootshtain, Porfolio Manager,
Trying to make sense of uncertain times
In times of economic hardship, it’s important to stay adaptable in order to navigate through tough ﬁnancial times and ﬁnd ways to thrive amidst uncertainty.
Surviving and thriving: navigating tough economic times
Does anyone get the feeling that markets have stopped making sense – or is it just me who is struggling to make sense of an eﬃcient market way ahead of where I see it?
A comment recently heard was that “some of the brightest analytical minds in the ﬁrst world have been way oﬀ the mark on their economic forecasts for over a decade now.” Some would argue that this has been the case for even longer.
Add to this the complete overload of contradictory market signals and divergent views amongst market commentators, and things just get worse. As Sandi Bragar, Chief Client Oﬃcer, and Partner at Aspiriant in San Francisco, says, it is “almost like we’re in a pinball machine; investors are just getting hit on diﬀerent angles, running into diﬀerent pieces of news and it’s hard to pull it all together.” So where do we go in such an environment? And how does one invest?
We should take a step back and contemplate three broad scenarios our Chief Investment Oﬃcer, Arno Lawrenz, has been discussing since the middle of last year. They are:
The stagﬂation scenario
This is characterised by persistently higher inﬂation, combatted by central banks continuing to raise rates even higher. The result is that inﬂation combines with higher rates to destroy demand and the economy sinks, with potentially harmful consequences for middle- and low-income economies alike.
The recession scenario
Central banks persist with their rate hikes triggering a global recession with commodity prices tumbling and inducing rapid falls in inﬂation rates back towards long run norms. Equity markets are most vulnerable in this situation. Under this scenario, rates will rise less and central banks will begin to ease sooner. According to a recent Bank of America Merrill Lynch survey, over 87% of porfolio managers anticipate that the U.S. economy will fall into a recession this year. But there is no consensus on just how extreme it will be.
The goldilocks or soft-landing
Central Banks succeed in bringing inﬂation under control quicker than most anticipate. The most important aspect of this scenario is that the Central Banks manage to cool down the economy just enough, without triggering a recession. And that gives them more room to stimulate and support renewed economic growth without triggering another hyper-inﬂation cycle.
The common theme in the mentioned scenarios is that in the end, inﬂation will revert to expected low levels. As Jim Reid, Head of Thematic Research at Deutsche wrote, “Low, stable inﬂation and historically low interest rates have been the glue that have held together macro policy for the last three decades.” So, what if this unravels and we land up with inﬂation at 3% or 4% instead of at 2% or lower? Rising levels of Sovereign Debt accompanied by higher interest rates will result in higher debt servicing costs, which makes it diﬃcult, if not impossible to achieve the social and economic goals that many Governments view as a basic mandate and responsibility. This could also mean that we ﬁnd ourselves heading into a sustained period of lower growth and fewer opportunities.
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Investing in turbulent times
So then where and how should one be positioned in these times? Uncertainty like this argues for diversiﬁcation and caution. And an extraordinarily strong stomach! A balanced approach, in a diversiﬁed porfolio is the way to go. And this certainly speaks to the need to be nimble in our approach with the ability to change course rapidly as the expected heightened volatility will produce opportunities for additional return. As John Maynard Keynes said, “When the facts change, I change my mind. What do you do sir?”