How investors can be rational in an irrational world
Strategist pushes thematic methodologies
It’s hard to believe the U. S. will start a military conflict with North Korea, but as tensions rise, investors are finding it difficult to have a rational approach to the market in an irrational world.
Attempting to handicap the outcome of the current dispute is hopeless, largely because politicians can quickly lose control over events.
“If there is sufficient momentum, war could become inevitable, even if the leaders think it is not a wise choice,” said Viktor Shvets, head of Asian equity strategy at Macquarie.
In an effort to avoid undermining t heir own existence, dictatorships like Kim Jong Un’s in North Korea have pursued courses of action that led to their own destruction. Letters between cousins Kaiser Wil- helm II of Germany and Tsar Nicholas II of Russia show that they tried to avoid the First World War, but failed because of the shrill voices around them.
“Politics regularly loses control over events,” Shvets said. “Extreme outcomes and accidents not only cannot be ruled out but in fact are common through history.”
If investors think they have the expertise or tools to make meaningful predictions in these matters, they’re wrong. The strategist noted that equity markets have never been good at pricing geopolitical risks, and investors often fail to appreciate impact of events, whether it was the Battle of Stalingrad during the Second World War, the Vietnam War, or more recently, the Arab Spring.
“The assumption is that politics fix geopolitics and that central banks fix economies,” Shvets said. “Equity investors prefer to return to their areas of expertise and leave geopolitics and economics aside for as long as humanly possible.”
Yet while many outcomes are unpredictable, longer- term trends are much more cl ear. For example, t he changing relationship between technology and society is forcing investors to accept that they live in a world of declining returns on conventional capital, but rising returns on social capital.
“It dis-intermediates businesses, destroys labour markets, unleashes waves of immigration and increases inequalities while causing divergence between nations,” Shvets said. “It is a recipe for persistent conflicts.”
The strategist tries to avoid debates about North Korea’s intentions, and instead focuses on the fact that global tensions are likely to persist for years or perhaps decades.
With that in mind, he recommends thematic investment approaches, including the replacement of humans, bullets and prisons, and pure disrupters. For investors who shy away from themes, Shvets insists a mix of quality, growth and sustainability is the way to go.
“If one does not have an edge in assessing geopolitics, one can protect portfolios by utilizing secular themes and/ or investing in stocks that have a durable advantage,” he said.
Some of the recommended names in Mac quarie’s Global“Quality Sustainable Growth” Portfolio include Alphabet, Amazon, Facebook, Johnson and Johnson, Walt Disney, Siemens, Honeywell, Broadcom, FedEx, Adidas, Capgemini and Yamaha Motor.