Choosing businesses in which to invest is, in many ways, like choosing which boat you would to take across a vast ocean. Some boats are bigger, sturdier and slower; while some are lighter, more agile and faster. But it’s not just the boat that matters. Anticipating the weather conditions is often just as important. Value investors have, for decades, debated the merits of considering the macro conditions in which businesses operate. Until the 2008 crisis, many believed that consideration only of the underlying business was required for a successful investment. Over the last decade, however, the global economic “weather” has been so connected and significant to equity returns that investors really face little choice: they must consider the global economic winds, currents and waves when selecting their portfolio investments.
Just as quickly as Mother Nature can change her mind, so too can the global tides of financial markets change. In 2017, the global equity market, as represented by the MSCI World Net Total Return Index, changed by more than one percent from the prior day’s closed only on three occasions. In 2018, a daily change of at least one percent had occurred more than 30 times by November.
What are the major weather events that face global investors today? Unfortunately, there are many.
Let’s start with the evolving World Order. The view of the Chinese Communist Party from the shores of the United States has rapidly evolved from one of reformer, to one of strategic competitor. The range of possible geopolitical outcomes that could emerge as the two global powers find their new place in the world is wide and the consequences significant.
Next is the global monetary experiment that took place over the last decade, resulting in a swelling of central bank balance sheets by more than US$10 trillion. The impact of such large-scale global asset purchases was to push down the cost of money. Similarly, the cost of money has started to increase now that these purchases are being unwound. What will be the impact of this unwind for global financial markets? The truth is, no one knows for sure: such a large-scale global monetary experiment has never been conducted before by humans.
Over the pond, the UK is rapidly trying to work out arrangements for its leaving of the EU by the end of March next year. With enormous domestic division on what is and is not acceptable, leaders of the UK face an extraordinarily difficult challenge of avoiding a “no-deal” Brexit which could well be disorderly.
And this is not to say the EU is out of the woods even with a smooth Brexit arrangement. The continual division inside the EU around immigration rules, public deficit limits and other regulations presents its leaders with an exhausting game of whack-a-mole: extinguishing one crisis just in time to face the next. And this has been the case with a steady leadership in Germany – by far the most important and powerful decision maker inside the EU. This steadiness is starting to erode with the major domestic parties losing popularity and the emergence of new, more fragmented political parties.
These dynamics are fluid and the outcomes unpredictable. They also sit on top of the longer-term structural currents of aging populations in most of the developed world and China; and the unfolding impacts of how rapidly-improving computing power can be combined with enormous data reservoirs to unlock new artificial forms of intelligence.
The navigation of vast global seas is not just about the boat you select. It is also about your awareness and anticipation of the ever-changing and complex weather conditions.
Andrew Macken is Chief Investment Officer with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.