Global woes pose biggest threat to index investors

Investment strategies yoked to indices face the most risk as the 30-year global economic détente unravels, according to UK-based economist, Andrew Hunt.

Hunt told a Nikko Asset Management webinar audience last week that index investors benefited over the previous three decades from “chasing liquidity” and themes predicated on growing economic collaboration across the world. But rapidly developing cracks in the global accord – underscored by the Russian invasion of Ukraine – present new risks and opportunities for investors.

“Indexes have been chasing winners from the last cycle,” Hunt said. “But different winners are going to emerge now.”

Hunt holds that the world is likely to tip in to recession soon, if not already in some regions such as Europe, as central banks tackle inflation by draining liquidity from the system and raising rates. However, he believes that inflation and recessionary outcomes will vary according to region and how different monetary authorities respond to the challenges ahead.

“There could be a big turn to (entrenched high) inflation,” he said, if central banks and governments reprise the 1970s of excessive easing at the first sight of recession.

“In the 1970s governments didn’t get much return (from easing) in terms of growth but they did get inflation.”

Optimistically, however, Hunt said most central banks have learnt the lessons of the 1970s and should stick to inflation-fighting mode – albeit under certain constraints in Europe, particularly.

“There’s not systemic inflation yet,” he said. “There needs to be a policy mistake for that, which we’re not seeing yet – except in China.”

China could experience a serious inflation problem following the recent easing, Hunt said, as the government tries to revitalise the flagging economy. Emerging markets also presented a dilemma for investors, requiring new strategies that take into account rising currency volatility and a changing credit cycle.

Illustrating the growing split in the global economy, he highlighted the recent dismal performance of markets in the two long-standing East-West “gateway” cities of Hong Kong and Istanbul – both down about 50 per cent from peaks.

Amid the growing uncertainty, Hunt said certain equities had moved into value territory while investors should view holding cash as an option to buy when markets fall further rather than for protection. Contrary to recent downbeat news on fixed income, he said “I’m not particularly negative on bonds.”

“In fact, there may be some buying opportunities at the long end in the second half of this year.”

Prior to forming the eponymous Hunt Economics in 2001, he served a 12-year stint as an economist for the Dresdner Bank Group in the UK and Asia. Hunt is a regular on the Nikko expert guest list, frequently visiting Australia and NZ to present his often contrarian views.

David Chaplin

David Chaplin is a reputed financial services journalist and publisher of Investment News NZ.