Monthly Market Update: The crystal ball is blurry

Wed 14 Jul 2021

Visibility about the future is as low as it has ever been. In recent memory it is difficult to recall a market and economic environment with such low degree of consensus amongst investors and business leaders. Even as vaccination is bringing the world closer to the end of the pandemic, uncertainty is everywhere to be seen. It is evident in inflation scenarios, where experts predict anything from 20’s or 70’s style hyperinflation to outright deflation. Growth, even for the next few months is equally uncertain. The International Monetary Fund (IMF), the Organization For Economic Cooperation and Development (OECD), the World Bank, the Bank of International Settlements, Central Banks and fiscal watchdogs, all equipped with some of the finest economic minds in the world, are changing their forecasts significantly every few weeks.

Uncertainty is evident is supply chains. The global stocking/unstocking cycle has been disrupted, as economies open up and close down without warning. Complex products, like cars or computers, rely on functional supply chains to produce the thousands of parts needed for assembly. Purchasing managers can’t plan, so they order at the last minute. Without planning, costs skyrocket and lead and delivery times are extended to the point of nearly breaking supply chains.

Uncertainty is evident in investments. While headline indices remain at all-time highs, portfolio managers stick with the sure winners, once again growth stocks. Income stocks on the other hand, where investors absolutely need a modicum of certainty about future cash flows, suffer. As the bond market is dismissing all notions of future inflation, its the gold market and style that investors are oscillating between.

The pandemic, eighteen months in already, is leaving the world in disarray. The objective for asset allocators, at this point, or any other for that matter, is not to predict the future. It is to prepare for eventualities. We have spent the last few months mapping out growth and inflation scenarios and looking at what these logically mean for risk assets. From a return to before 2008, to growth managed by the state, to stagflation and to the return of ‘secular stagnation’, we have looked at the past and reasoned about what the future might look like under all of these. While we can’t accurately predict where the world will go, we have made sure our portfolios are resilient and prepared. We have evened out our growth and value exposure, focused on managers with a proven ability to create alpha and we have taken few ‘bets’ only in high conviction and low downside positions, like an overweight on UK equities and an underweight in bonds.

-George Lagarias, Chief Economist