For super funds and their advisers

Pessimism and optimism swirl in deep water waves


Kim Catechis says he was not pessimistic when he wrote ‘Deep Water Waves’, his first major strategy report for investors through the Franklin Templeton Investment Institute.

The report, published in August, sparked a series of discussions within and outside the Franklin Templeton group. If one of these is a guide, from an investor webinar held last week (October 6 New York time), pessimism about the investment world was just as likely a sentiment evoked as optimism.

The invitation to attend the webinar sets the tone, building like the theme music from Jaws. It says: “Deep water waves start out wide and accelerate rapidly. Though the surface appears calm, it’s hard to determine a wave’s power until you’re caught in its grip.

“As investors, we react to what we can easily observe – such as Covid-19, geopolitics, debt and extreme weather – but it can be difficult to determine what lies beneath these factors.

“Powerful, unseen forces are sweeping away established assumptions and blurring the lines between developed and emerging markets.”

Catechis is the former investment strategist at Martin Currie and long-time driver of its emerging markets capability, who joined the new Institute in February, shortly after its formation, as investment strategist.

Catechis had spent 14 years specialising in emerging markets at Scottish Widows, heading the global team before leading a group of his colleagues, including Alastair Reynolds, to join Martin Currie in 2010. He passed the baton onto Reynolds, current head of Martin Currie’s EM team, in 2019 to adopt the strategist role.

Alastair Reynolds

Reynolds, one of the panelists on last week’s webinar, was prompted to say: “I’m an optimist. I’d like to think that people will be surfing those deep water waves.”

The Institute’s formation was part of the restructure which followed Franklin Templeton’s acquisition of multi-affiliate manager Legg Mason. Its aim is “to drive collaboration, both inside and outside of our investment organisation, to provide a forum for investment insights and their practical application”.

In his new role, Catechis reports to Stephen Dover, the former head of equities at Franklin Templeton, who is chief market strategist. Dover’s old position has been filled by Terence Murphy, the CEO of affiliate manager ClearBridge Investments who continues in that role and also joins the company’s executive committee.

The Institute has organised a series of think tanks and academic partnerships. In the webinar produced last week Catechis chaired a panel to discuss three of his six mega trends which he labelled ‘deep water waves’.

Sonal Desai

The three discussed by Reynolds in Edinburgh, Sonal Desai, CIO of Franklin Templeton fixed income in New York, and Pawel Problewski, portfolio manager of international growth strategy at ClearBridge, also in New York, were:

  • The technology wave – The next decade will see an urgent and widespread boom in investments in innovation across all economic sectors. It will be in both private and public sectors, with much of it driven by geopolitical imperative, not just economic value. The impact of current supply chain disruptions.
  • The debt wave – The tension between inflation and deflation will continue, but the calculus has changed. Controlling inflation should take precedence over economic growth, but strategies will vary by country. Most countries now have very limited ability to issue debt, and many have seen their sovereign ratings downgraded, prompting some to attempt progressive and redistributive taxation along with unorthodox economic experiments. The wind down of pandemic stimulus and its influence on this dynamic.
  • The climate wave – Climate change is finally being accorded the attention it requires, yet investors are awaiting policy detail from governments and regulators as well as private sector innovation. In the meantime, climate change will increasingly exacerbate border tensions, threaten agricultural production and heighten social stresses in many regions. How will extreme weather leading to floods, droughts and fires accelerate this change?

The other three detailed in the report are: the ‘Demographic Wave’, the ‘Taxation Wave’, and the ‘Geopolitical Great Game Wave’. Reference to the ‘Great Game’ gives the reader an inkling into Catechis’ interests. He not only speaks five languages; he is also a student of political history.

The ‘Great Game’, according to one of the 28 footnotes in his report, refers to the 19th century struggle between Great Britain and Russia to try to fill the vacuum created by the political decay of Islamic Asia. “The Russians refer to it as Bolshaya Igra and it started from Constantinople and ranged to Persia, Afghanistan and the rest of Central Asia,” the footnote says.

Optimism lies in the opportunities created by each of the mega themes, some of them overlapping. For the fight against climate change and all its direct and indirect costs, the “big overarching theme” is electrification, Reynolds said.

“Emerging markets manufacturers of batteries and infrastructure will power much of the world’s electric adoption, plus the supply of metals.”

The transition away from coal in China and India would also happen on such a huge scale that it would require a range of things to be involved for replacement renewables.

Some of the long-term consequences of covid-19 would come from policy responses by governments, Franklin Templeton’s Sonal Desai said. The monetary easing around the world had come after several years of already loose monetary stance after the global financial crisis.

“The normalisation of monetary policy constitutes a major ‘deep water wave’ challenge, exacerbated by the recent upward shift in inflation and inflation expectations. The increase in public debt levels represents another critical long-term challenge…

“The cost of enacting countercyclical fiscal measures and/or rolling over maturing debt could start to increase with each passing crisis/downturn, bringing into question debt sustainability. Put simply, debt is sustainable, until it isn’t.”

She said the debt problem intersected structural trends already underway, including the rise of protectionism and the accelerated adoption of new technologies.

With protectionism, the importance of well-developed supply chains was highlighted as a critical competitive advantage. With technology, the acceleration in its adoption had significant economic impacts.

ClearBridge’s Pawel Wroblewski said: “Advances in computing and artificial intelligence (AI) will create numerous opportunities. Many existing industries and companies will benefit by adopting new AI solutions, but many new business models will also be created as AI progresses.”

When coupled with computer vision technology, AI would help solve some of the huge challenges ahead for the world. They also had many applications in health care in terms of preventive medicine but also in advanced biotech and drug discovery. Companies that created or adopted these solutions often created a lot of value, he said.

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