During a recent media briefing, GSFM investment strategist Stephen Miller highlighted some of the headwinds investors will face moving forward.
“Trade wars, deglobalisation and re-regulation, dysfunctional politics, cyber wars, climate change, inequality and ‘oligopolistic privilege’ were already playing out in the global economy, and COVID-19 has intensely exacerbated uncertainty,” Mr Miller said.
The investment strategist highlighted that this has come at a time when central banks around the world have at best exhausted monetary policy.
“And at worst, inappropriate. The transmission methods don’t appear to be working as effectively as they have done in the past. And when we approach the zero bound on interest rates, it’s not clear to me that lower interest rates or negative interest rates will result in more spending,” Mr Miller continued.
“Arguably, there are income effects where workers try to save more to meet preordained retirement targets, so it might be that lower interest rates or easier money doesn’t have the same spending-enhancing effects it’s had in the past.”
Mr Miller noted that advanced economies’ equities are not cheap and seem to be priced for an optimistic but not necessarily implausible scenario of central banks and policymakers steering investors through the COVID-19 crisis.
In addition to this, investors might also be overconfident about the prospects of big US tech, which recently reached an all-time high, but face the prospect of being broken up if the Democratic Party wins the upcoming presidential election.
“That reflects an extraordinary faith in the ability of policymakers and central banks to navigate a path through. And it also implies that the markets are pretty sanguine about the oligopolistic privilege currently enjoyed by a few of the FAANG.”
And with bond yields approaching the zero bound, it’s no longer clear that they’re a worthwhile diversifier for a portfolio of risk assets. This means that investors might need to look to gold, absolute and unconstrained bond strategies, and active equities including long/short and hedge fund exposure.
“Are markets complacent?” Mr Miller said. “Are we complacent about the onset of regulation? Are we complacent about oligopolistic privilege? Are we complacent about the ability of central banks? One of the big lessons we need to take away from this is that we need to relearn the importance of diversification – uncorrelated sources of return in a multi-asset portfolio.”
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