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It’s a crazy world out there

23 May 2019 Jonathan Faurie

The world is a crazy place at the moment.

In the past, it was possible to look at investment markets and make educated guesses on behaviours based on a specific set of metrics. It was then possible to identify sectors and companies that would generate alpha. 

This is becoming increasingly challenging in the world today as there are a number of metrics that contribute more towards unpredictability than towards predictability. At a panel discussion on the second day of the recently held Investment Forum, these metrics were discussed. 

At war with itself

Market unpredictability (and downturns) always used to come when there was a major international conflict. This could be seen during World Wars I and II. 

This was when the world was at war, when nations were at war with each other. At the moment, nations are at war with themselves and we are seeing this unpredictability play out in markets. 

“Donald Trump shook the world when he became the US President. While there has been a lot of unpredictability surrounding the US from an outsider’s perspective, Trump has been good to the US to some extent. He has implemented policies that focused on putting the US first and his approach to tax reform has been good for the country. How the US pushes ahead and deals with its future relations with China will determine future global unpredictability,” said Louis Stassen, Portfolio Manager at Coronation, who pointed out that there are a lot of examples of how the US political landscape has contributed to unpredictability and uncertainty. 

The second example of where a nation is at war with itself is in the UK. While Brexit is mostly an event that affects the UK, the fact of the matter is that fund managers are managing funds where investments are UK based. 

“Fortunately, British assets are seemingly cheap. Whether this is a good thing or not remains to be seen. Overall, the exposure to assets in the UK has been affected and a lot of fund managers are hedging their exposure to the UK because of its uncertainty,” pointed out Philip Saunders, Co-Head Multi Assets Investec UK. 

China rising

One of the biggest stories of the modern age is the growth of China where it has become the world’s second biggest economy while still being classified as an emerging market. 

What has China’s impact on the world been? Marc Beckenstrater, Portfolio Manager at Prudential, pointed out that without China’s growth during the current cycle, the world would have grown at a slower rate and would have been reduced by two thirds. 

“When China grows, the world gets stimulated. This is why the trade wars with the US is worrying. China will still grow in the future, but it will transform itself from a production based economy to a consumption based economy. This will have a specific impact on global growth,” said Beckenstrater who added that we shouldn’t bank on a significant cash injection following this change. 

Are bonds worried?

During times of uncertainty, investments have moved away from commodities and equities and have flocked towards cash and bonds. 

This proved to be a shrewd move as it provided a significant tailwind to the current growth cycle. But even this Investment has shown signs of having run its course. 

“There is a significant worry from the bond market regarding growth. Global debt levels are high and there is depressed growth in many global destinations. The US and Europe have traditionally been drivers of growth, but there has been a significant demographic shift in these markets to the point that they can be compared with Japan. Traditionally, market growth is driven by population growth and productivity over time. We don’t know where this will be in the future,” said Saunders. 

Where does this leave you?

The worst thing that can happen during this period of uncertainty is for clients to panic. Financial advisers are perfectly placed to refine and make sense of the noise that clients are exposed to on a daily basis. 

Time in the market is better than timing the market. But if anything, this period of volatility adds a lot of fuel to fire the debate around passive vs active investments. Client engagement needs to take centre stage now more than ever. 

Editor’s Thoughts:
While we may be at the end of a significant growth cycle, there is no guarantee that we are on the precipice of a recession. Growth will still be on the cards; we just need to manage our expectations about this growth when we consider the unpredictability we face. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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