What Has Changed?
Sinclair Currie, Principal and Co-Portfolio Manager
Equity markets crumbled further during October and November (albeit from what was an elevated level). It was notable that many of the stocks which fell the furthest (20% declines have not been uncommon) did not report any change in their outlook. With such meaningful moves and in the absence of company specific news flow investors should rightly question whether this can simply be explained away as an episode of volatility, or whether a feature of the broader landscape has fundamentally changed.
When we consider investing landscape, particularly the macroeconomic and geopolitical environment, we believe it is possible to identify broader trends which have remained resiliently relevant for decades. These trends have been generally supportive for equity markets and created fantastic growth opportunities for some industries and companies. To our minds three trends stand out as having been persistent features of the investment landscape for most of the current generation of investors. Firstly, monetary policy has been consistently relied upon to smooth economic cyclicality, secondly globalisation and free trade have been adopted broadly and finally the USA has held the status of the dominant superpower.
- Monetary policy and Interest rates – how low can they go?
Monetary policy has been deployed in a way which appears to have been mindful of asset prices since the 1990’s. Markets have even got a name for this – ‘the Greenspan put’. The notion of a central bank enforced investor safety net seems so entrenched today that the financial turmoil of the 1970’s or the inflation busting monetary policy of the 1980s seem inconceivable. Yet with miserly cash rates and leverage still trending higher it seems likely that unconventional policies (quantitative) will need to be deployed again should central banks attempt to smooth future economic cycles. Society’s appetite for and the economic sustainability and investment consequences of these policies are not fully known. Investor confidence in these new tools is yet to be tested or proven. It less certain how central banks will try and smooth the next inevitable downturn and what this will mean for markets. - Trade wars, breaking the rules?
The economic dividend of free trade (via the efficiencies derived by harnessing comparative advantage) has been broadly promoted and thus broadly adopted as a policy platform of major economies. Some of the world’s largest and most successful corporations have emerged or re-engineered themselves by expanding into new markets and adopting global supply chains in pursuit of maximum efficiency. Yet today the pockets of resistance to globalisation have coalesced into a meaningful force with political clout. Investors’ portfolios are naturally weighted to those successful companies which have exploited global trade to their advantage. A key change is that trade wars and any unwinding global trade raises new questions about the sustainability of these business models which have prospered via globalisation. - Team America?
The USA has been a leading power since the world wars and became the dominant superpower in the late 20th century. Investors have only known a world in which the weight of power has been concentrated in US. China’s emerging power is a topic of hot discussion and we expect adjusting to the developing shift in gravity created by this changed power balance will take time and impact on businesses, confidence and markets.
Perhaps, perhaps not. So what?
The relevance of the three themes identified above is not that they reflect accurate predictions of the future. We can’t know the future, but we can observe the present. The power of these themes lies in the fact that they reflect changing perceptions and challenge underlying assumptions which have been held for so long they are almost fundamental.
We expect companies priced for perfection have the most to lose from any elevation in uncertainty as was to some extent witnessed in October. On a more positive note there are also businesses ready or able to adapt, or simply in the right place at the right time. Identifying these remains our priority.