Riding out the new world order
Craig Lyall, Hedge Fund Manager at Ashburton Investments.
Managing the conflict between globalised investment opportunities and geopolitical protectionism.
At some stage in your life you may have experienced the hair-raising thrill of a rollercoaster. You’ll recall the slow, nervous climb, the thumping heartbeat in your chest and sweat droplets rushing down your forehead in anticipation of a self-inflicted nightmare. As you approach the peak your stomach jumps into your mouth, your eyes close shut. For a moment time stands still, then you drop, accelerating at a blistering pace, your head pressed deep into the headrest. The ground rushes towards you then suddenly a turn, the G-force so strong you might pass out. You’re upside down, right way up, spiralling out of control – then suddenly, all is calm. The thumping in your chest slows and screams disappear – normality is restored. The fear on your face turns to delight.
The experience, although daunting, was controlled. The structure meticulously designed, thoroughly engineered and tested by industry professionals who calculated every force, angle, drop, acceleration and speed to provide the optimum thrill with maximum safety.
Those of us involved in financial markets can liken the experience, to an extent. Whether a fund manager, analyst, broker, risk manager or investor we’ve felt the droplet of sweat build on our forehead, we’ve clutched our chairs and felt our stomachs jump into our mouths. Maybe it was the anticipation of a Federal Reserve interest rate decision, an unexpected company trading statement or presidential election that sent a share price, commodity or index spiralling out of control.
The driving force behind the present-day market rollercoaster was debated the other night at a dinner I attended, hosted by a prominent up and coming fintech investment holding company. I got the opportunity to sit around a table with fifteen individuals from various fields. Entrepreneurs, business leaders, investment professionals, creative writers and politicians. Of note was guest speaker Nelson Cunningham, not only the President and Co-founder of McLarty Associates but also serving President Clinton as a special advisor on Western Hemisphere affairs. He remains active on foreign policy and political matters and was a pertinent personality to share his views and steer conversation.
His topic for the evening involved the current state of the world and how it has veered from the anticipated trajectory laid down post the fall of the Berlin Wall in 1989 and as geopolitical tensions of the Cold War subsided. A shift in movement towards globalisation where borders became wider, international trade agreements were negotiated, the European Union (EU) expanded and Russia joined the G7 to form the G8. For many years, the world was becoming smaller, travel faster, business easier and financial markets more complex.
Then came the wobble. Despite warning signs, the 2008 banking collapse caught many off guard, wiping out almost $7 trillion from Wall Street. Central banks around the world had to intervene and over a short period financial markets became fundamentally different. Regulation was increased with the introduction of BASEL III banking regime, proprietary trading models had to change face, extravagant company spending was reduced and negative interest rates were introduced for the first time.
In 2016, the globalisation wobble intensified as the world was once again caught off guard with the British vote going in favour of leaving the EU and the rise to power of President Donald Trump with the slogan “Make America Great Again”. Both instances support a lock down of borders, limiting migrants and re-negotiating long standing global trade agreements. Almost suddenly a cycle that lasted over 30 years is on the brink of collapse. Close borders, remove migrants, build walls, promote local industry.
As the roller coaster experiences violent opposing forces, so does this political landscape. If we compare the state of international politics with the current blue-chip investment universe and white collar work environment we discover a present-day conflict. No longer are markets dominated by industry and unskilled job friendly enterprise but rather by tech heavy, artificial intelligence giants like Alphabet, Apple, Face Book and Amazon. BlackRock’s artificial intelligence risk system, Aladdin, manages 7% of all financial assets in the world. The fewer borders and protectionism the better as these giants grow subscriber and user numbers. Hot topics of conversation around office coffee machines are centred around the rise of crypto currency and blockchain technology. We are witnessing the rise of the remote work station where employees are becoming more productive by working from home, a satellite office or a coffee shop with a good Wi-Fi connection.
The result is a monetary system that requires skilled programmers to increase supply, not masses of blue collar labourers to operate machinery underground. A flexible work environment that needs little more than a laptop, power supply and internet connection to be productive, not costly commercial real estate in central business nodes with open plan cubicles and pedantic micro-managers. The evolution of online shopping is just another example of technology taking over. A single marketplace, an international currency, instantly, globally connected.
The discussion on ‘where to from here?’ and conflict between ‘protection’ politics and ‘open’ investment had few answers but a diverse number of thought provoking questions. Some were concerned of the murmurings of a financial crisis given high valuations and geopolitical instability, other worried about the social implications of rising inequality in a world growing in value but shrinking in labour needs.
Imagine the consequences for emerging markets like South Africa as more skilled and fewer unskilled workers are required to drive industry and growth. Retail store models would need to adapt to a growth in online shopping. This has interesting ramifications for a consumer-friendly country like South Africa that has one of the highest shopping centre square meterage per capita on the globe.
In the short and medium term, the ramifications of rising geopolitical risks play with the confidence of investors and speculators and drive volatility. Longer term, finding and unlocking fundamental value is very dependent on the state of economies and potential for growth. Investors have certainly hung onto their seats over the past 18 months, navigating through violent market movements with increased volatility around Brexit and then the US election. Markets have moved purely on specific wording in speeches made by policy makers. It appears information at our fingertips has led to rising speculation and panic investing. Recent high allocations to passive investments emphasizes this point as the ‘lazy’ investor follows macro trends and passive flows increase 1.
As hedge fund managers, we sit on both sides of the rollercoaster fence. We must anticipate every market movement, meticulously research and calculate possible outcomes to ensure our portfolios are structurally sound. Needless to say, the sweat droplets still grow in anticipation of the next violent fall or sudden change in market direction. We are buckled-up and prepared, ready to navigate the turbulence and ride out the storm, waiting for normality to be restored as fundamentals play out.
While the roller coaster provides the same thrill every time, the markets do not, they evolve and they surprise. To remain controlled under heightened pressure fund managers must remain informed, strategize over every possible outcome and remain dynamic and adaptable. The uncertainty creates opportunity and we must engineer our portfolio to withstand the stresses and strains that the market throws at us. Armed with an alternative mandate and a diverse set of trading and investment strategies we can adapt to an ever-evolving landscape. As discussed, the landscape may have changed and will continue to change but our investment objective remains the same; capital preservation, enhanced returns and sound risk management. Strap in and enjoy the ride.
