Investment managers must now scan the globe for opportunities
• The world economy’s dynamics are constantly shifting at a pace faster than a roller-coaster’s
At some stage in your life you may have experienced the hair-raising thrill of a rollercoaster ride.
Those of us involved in financial markets can identify with the experience, to an extent. 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-andcoming fintech investment holding company. I got the opportunity to sit around a table with 15 individuals from various fields. Of note was guest speaker Nelson Cunningham, not only the president and cofounder of McLarty Associates but also having served Bill Clinton as a special adviser on western hemisphere affairs.
His topic was the state of the world and how it has veered from the anticipated trajectory laid down after the fall of the Berlin Wall in 1989 and as geopolitical tensions of the Cold War subsided.
He noted a shift in movement towards globalisation, where borders became wider, international trade agreements were negotiated, the EU expanded and Russia joined the Group of Seven to form the Group of Eight. The world had become smaller, travel faster, business easier and financial markets more and 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 the 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 voting to leave the EU and the rise to power in the US of President Donald Trump with the slogan “Make America Great Again”.
Both instances support a lock-down of borders, limiting migrants and renegotiating long-standing global trade agreements. Suddenly, a cycle that lasted more than 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 conflict. No longer are markets dominated by industry and unskilled job-friendly enterprises but rather by technologyheavy, artificial intelligence giants such as Alphabet, Apple, Facebook and Amazon. The fewer borders the better as these giants grow subscriber and user numbers.
BlackRock’s artificial intelligence risk system, Aladdin, manages 7% of all financial assets in the world.
Hot topics of conversation around office coffee machines centre on the rise of cryptocurrencies and blockchain technologies. We are witnessing the rise of the remote workstation, where employees are becoming more productive by working from home, from a satellite office or a from 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 and not costly commercial real estate in central business nodes with open plan cubicles and pedantic micromanagers.
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 over the murmurings of a financial crisis given high valuations and geopolitical instability, others 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 SA 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 consumerfriendly country like SA, which 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 on to their seats over the past 18 months, navigating 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 emphasise this point as the “lazy” investor follows macro trends and passive flows increase.
As hedge fund managers we must anticipate every market movement and meticulously research and calculate possible outcomes to ensure our portfolios are structurally sound.
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, strategise over every possible outcome and remain dynamic and adaptable.
The uncertainty creates opportunity and we must engineer our portfolios to withstand the stresses and strains the market throws at us.
Armed with an alternative mandate and a diverse set of trading and investment strategies we can adapt to an everevolving landscape. But our investment objective remains the same: capital preservation, enhanced returns and sound risk management.
Strap in and enjoy the ride.
WE MUST ENGINEER OUR PORTFOLIOS TO WITHSTAND THE STRESSES AND STRAINS THE MARKET THROWS AT US