Taal selectie


the unpredictable

Pascal Blackburne & Luc Synaeghel 2018-04-01

Ten years have gone by since the Great Financial Crisis. The sequence of events that unfolded during this decade has profoundly transformed the world – not only for investors but for society at large. Democracy and free trade are under attack, technocrats have become very powerful, international institutions are unable to fulfil their historical role, and « peace for our time » is no longer assured.

Before 2008, investing was relatively “easy”. Predicting economic growth – within a cyclical framework – was the name of the game. Interest rates and company earnings simply followed suit.

Then came quantitative easing policies by central banks, driving interest rates down to zero and asset valuations up to peak levels, thereby erasing business cycles and the healthy process of “creative destruction” in the economy. Europe suffered a severe sovereign debt crisis, forcing creditors to take a haircut on Greek government bonds, an outcome thus far confined to emerging-world countries. Social media networks underwent mass development, their data then to be exploited by “big data” analytics, contributing to the election of populist leaders in a number of countries. Not to forget the Arab Spring revolutions and resulting refugee crisis, or the more recent hype around cryptocurrencies.

For investors, predicting economic growth, interest rates and company earnings remains an important undertaking – but has become only part of the equation. Understanding the geopolitical scene is now just as important, with the Syrian war ground epitomizing the various, evolving and sometimes surprising, coalitions between the major world powers.

However risky the geopolitical scene, we remain confident for the time being that the situation will not escalate out of control, be it on the trade or military fronts. That said, oil stands to benefit from the uncertain environment (with shale producers having the added earnings advantage of a growing production) and gold typically provides the ultimate hedge against military conflict.

We also sense that the relentless uptrend in financial markets is broken, meaning that active investment should prove more rewarding going forward. This time is not one to take directional bets. Rather, upping the cash position in portfolios will make it possible to seize investment opportunities during episodes of market stress – with a view to selling them in calmer waters. Within the fixed income space, we still feel comfortable taking virtually no interest rate risk (i.e. having near-zero duration) and turning to credit or currency risk in order to generate some return. Finally, in equities, we continue to focus on niches that combine strong fundamentals and attractive valuations.

2008-2018: A decade of events that reshaped the (investment) world

Quantitative easing measures

One of the consequences of zero interest rate central bank policies, is that companies that would not have survived in normal financial conditions are still active, thanks to abundant and “free” capital. As such, not only was the usual process of creative destruction averted, but a different type of disruption has emerged. Money-losing “cloud” companies are competing on unfair terms with traditional “brick and mortar” companies, undermining long-held business models and making earnings predictions very difficult.

Eurozone debt crisis

Prior to the European crisis, government debt restructuring was an emerging-world phenomenon, generally steered by the International Monetary Fund. For creditors to take a haircut on bonds of a Eurozone member government (Greece) was simply unthinkable. This is a lesson not to be forgotten when holding bonds of other highly indebted Eurozone countries such as Italy, Portugal, etc. The unthinkable might again become reality when the next crisis strikes.

Arab Spring and resulting refugee crisis

Just as the blow dealt to the Eurozone construction by the sovereign crisis was finally waning, European leaders were confronted with another crisis: a massive influx of refugees seeking asylum in countries themselves still reeling from austerity, slow growth and high unemployment.

Social media, “big data” and the rise of populism

How rampant social networks have become over the past ten years has undoubtedly played an important role in shaping today’s world. Information flows faster and further, but it is also increasingly one-sided. People read what their “friends” read and “like”, and have pulled away from more unbiased news sources (such as newspapers or publicly-owned news channels). By engaging in social media people provide valuable information about their attitudes, preferences, habits, wealth etc. “Big data” software tools can then extract value from the huge amounts of data accumulated.

A negative aspect of “big data”, as we are now discovering, is its use to target voters, which purportedly brought about the Brexit decision and Trump US presidency. To be fair, these populist outcomes are also an expression of middle class anger with respect to fast rising inequalities since the Great Financial Crisis, another consequence of quantitative easing and zero interest rate policies.

Cryptocurrency mania

Historically, excessive money printing tends to result in a loss of trust in that money – and the emergence of new currencies. The bitcoin fever of late 2017 is not surprising in that regard: it is a currency designed precisely to avoid government intervention in private property. Investor enthusiasm for cryptocurrencies – which recently led to massive losses – was also fuelled by the dwindling returns available in the majority of traditional asset classes.

Geopolitics now an important component of the investment equation

Hungarian electors’ overwhelming vote to grant their prime minister a third mandate is but the latest example of strong “dictator-style” leadership taking over – and holding onto – power in many parts of the globe.

Turkey has its Sultan Erdogan, Russia its Tsar Poutine, China its Emperor Xi Jinping and the US its General Trump

Just consider: Turkey has its Sultan Erdogan, Russia its Tsar Poutine, China its Emperor Xi Jinping and the US its General Trump.

Note that we find the recent amendment of the Chinese constitution, abolishing presidential term limits, particularly worrisome given the centralisation of power in that behemoth economy. Everywhere, military spending is on the rise and must be looked straight in the eye. Developments in Syria are particularly important to monitor, to the extent that the (now very limited) Islamic State presence in that country is serving as an excuse for all major powers to cross swords. While each clearly has its own agenda, coalitions have been formed – and evolved – over time, sometimes of a rather surprising nature. Take for instance the case of Israel and Saudi Arabia, between whom ties have recently grown out of sharing a common enemy, Iran. Related to this, and also key to watch, will be President Trump’s forthcoming decision about whether to pull out of the Iranian nuclear multilateral accord.

And then, of course, there is the growing risk of protectionism, with the US and China having recently raised their tone.

We can only hope – and that remains our scenario for now – that aggressive rhetoric will not translate into a full-fledged trade war, which would cause severe damage to the global economy.

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