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‘Your entire philosophy is self-survival’: Three ways forward for investors

ASFA’s 2023 conference began with a pessimistic but realistic view of what investors can expect. They either need to build more resilient portfolios, trade more or “nail their colours to the mast and sail”.

Viktor Shvets (pictured), Macquarie Capital head of global and Asia-Pacific equity strategy drew two conclusions at the start of ASFA’s 2023 conference. First, the investment climate over the next 10-20 years will be “drastically different” to the experience of the last 30 years, with the experience of the 1930s offering the best benchmark. Second, team transitory was right – but that doesn’t mean inflation will disappear for good.

While the disinflationary pressures of the last 30 years – financialisation of societies, bad demographics, high inequality – are still with us, inflationary pressures mostly stem from responses to black swan and fat tail events, Shvets said, which are becoming more common.

“What we have now is a disinflationary backdrop not dissimilar to the last 20-30 years, but we will also continue to have significant inflationary spikes, on and off, on and off, every several years, maybe even every six months, over the next 20 years,” Shvets said. “What that basically means is that normal distribution upon which policy makers and corporates and investment managers are basing their decisions will no longer exist. Now what we have is a very high kurtosis; a very high asymmetry of outcomes.”

It’s tempting to describe this environment as uninvestable; certainly it’s not going to feel like there’s any equilibrium. But there are two main ways to play it, Shvets said. The first is to “do what the market tells you”; form no views and trade near-constantly. The market gives managers a signal every day, but managers “refuse to accept it or argue with the logic of that signal”.

“One way to deal with it is to stop arguing,” Shvets said. “The market gives you a signal; today it’s recession, fine, tomorrow it’s a bull, fine… Usually humans aren’t good at this because it requires a condition of no memory, no commitment, no backbone, no affinity, no preconceived ideas. So machines are usually much better at doing it.”

“If you have a lot of volatility, if you have a lot of variables all interacting unpredictably, if there’s no clear path… You don’t have a philosophy of life; your entire philosophy is self-survival. Not many investment managers culturally or institutionally can embrace that.”

So the second way to play the environment is to “nail your colours to the mast and sail”.

“I think what’s going to happen over the next five years or so, asset allocators instead of asking you whether you’re going to make money for them will ask you what you stand for,” Shvets said. “In a world where nobody knows what’s going on, where value investors are becoming growth and growth investors are becoming value, emerging market investors are redefining indices by getting rid of China and putting in Japan – when everybody is all over the place, the fact that you’re clear in the objective you want to pursue will get you the money.”

But those two schools of thought will really only apply to 20 per cent of managers, Shvets said; the other 80 per cent need to find a third way and build resilience into their portfolios by finding companies that have the ability to grow productivity at a low multiple; identifying “circular drivers” like automation and the new technologies that are developed to alleviate the pressure that workers feel from being replaced (“opium of the people”, or anything to do with entertainment); and participating in “regulatory arbitrage” or investing into obvious areas like alternative energy sources.

“When people ask whether inflation on average will be higher or lower, there will be no average; you’re going to have highs and lows. In that sort of environment, you can’t say a given asset class is dead. You can’t say that bonds are dead, that high-yield is dead, that sovereigns are dead,” Shvets said. “You can’t say equities are dead… all of that could make money or lose money in a significant way depending how you position your portfolio.”

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