Many investors find themselves in a market environment that is none like anything they have seen before. From decades-high inflation, food and energy shortages, and an ongoing war; there is so much going on. We would like to touch on some (not all, as that would take a while) of the predominant themes that have taken shape in the investment space over the last couple of months.
It is fitting to start with inflation, considering it is currently influencing everyone on the globe. For many years the developed world had several factors contributing to the disinflationary environment, including the fall of the Soviet Union, globalisation, technological advancements, and cheap labour from China.
Unfortunately, many of the above factors are coming to an end — China’s labour market has imploded and costs are roughly 20 times what they were, Russian commodities are going off the market due to sanctions, and countries are more worried about independence than globalisation. Couple this with the vast amount of stimulus that was pumped into economies in response to Covid-19 and the war in Ukraine and you have the decades-high inflation we are seeing today.
The reason that this is such an important subject in the investment space is because in the past central banks were able to pump up the economy (by way of QE and lower interest rates) whenever a slowdown would occur. Two good examples of this are the dot-com bubble and the 2008 financial crisis and how major central banks did not hesitate to provide stimulus and spur growth.
Unfortunately, central banks do not have this luxury anymore as they now need to contend with decades-high inflation. To do so they need to apply restrictive monetary policy which by its very nature slows economic growth. The problem is that we are showing signs of a global slowdown at the same time. Thus, for the first time in a very long time, major central banks are tightening conditions into an economic slowdown to fight inflation. Whether they can do so without pushing the economy into a recession is unknown, but highly unlikely. Consequently, investors should all be preparing for this worst-case scenario and adjusting their portfolios accordingly.
I am sure none of us need to be reminded about the ever-increasing energy prices and shortages that have been felt across Europe and other parts of the world. The most notable and influential is the increase in oil and gas prices.
Many believe that the root cause was the war in Ukraine and subsequent sanctions on Russia. While, this may have exacerbated the problem, the root cause has stemmed from years of investment decisions. Due to the global focus on ESG, institutional investors have not been investing much in the energy sector — oil and gas in particular — for years.
The net-zero banking alliance formed by the United Nations represents 40 percent of global banking assets and they are committed to aligning their lending and investment portfolios with net-zero emissions by 2050. These financial institutions are committing to reduce emissions by basically starving oil and gas producers of capital. The result is that the oil and gas producers are forced to cut down on capital expenditure and new developments.
Currently, we find ourselves in an environment where supply simply cannot keep up with demand and, as a result, we are seeing sky-high prices across both oil and gas.
Market players are starting to realise that to transition to a green economy, oil and gas will need to play a key role if we are to avoid energy shortages. The problem is that exploring and developing new production capacity takes many years. The consequence is that we will likely have to live with elevated prices for a while unless the sector begins to see more capital flows so that the necessary capex can be made.
When looking at the agricultural sector it is no shock that the price of food has increased drastically. One of the big moves in the agricultural sector has come from fertiliser prices, whose main inputs — nitrogen, potassium, and phosphorous — have gone vertical and, consequently, caused the price of fertiliser to reach new highs.
The squeeze in the fertiliser market started when China, which represents about 30 percent of world fertiliser production and 15 percent of exports, halted phosphate exports in September 2021 in an effort to ensure adequate domestic supply. Then came the Russian invasion of Ukraine which has only exacerbated the problem due to the world’s reliance on Russia for fertiliser. Russia produces 9 percent of global nitrogen fertiliser, 10 percent of global phosphate fertiliser, and 20 percent of global potash fertiliser. Consequently, the sanctions placed on Russia have further hit the supply of fertiliser globally.
These high fertiliser prices feed into the economy by putting pressure on farmers’ margins, especially for fertiliser-intensive crops such as corn, who then have to increase the price of their end-products to make ends meet. This is just one of the many facets of the increasing food prices, other factors like energy prices, supply chain issues, and labour shortages have all contributed to higher prices.
The result is that we may find ourselves at the onset of a global food crisis which will likely cause famine in many agricultural-reliant countries and that investors will need to position their portfolios accordingly.
As you can see, we are currently living in a very uncertain and complex investing environment. This is why, at Global and Local Asset Management, we have positioned our Worldwide Flexible Fund to navigate this challenging investment landscape. We have allocated capital towards the sectors and stocks that will not only weather the storm but benefit from the above mentioned themes. It is never too late to prepare for what lies ahead.
It is in uncertain times like these that investors tend to impound stock prices with vague and ambiguous information in a systematically incorrect way. Therefore, at Global and Local Asset Management, we employ New Age Alpha’s Avoid the Human Factor solution. The Human Factor is an actuarially based portfolio tool aimed at mitigating human behaviour risk in stock picking.
New Age Alpha is a global leader in building actuarial-based asset management solutions that aim to protect investor portfolios against this idiosyncratic risk caused by human behaviour. Investors are unaware of this risk that leads to loss, cannot be diversified away, and don’t get rewarded for taking it. Unlike firm-specific risk, which can often be diversified away, this risk affects stock prices specifically and we believe is caused by human behaviour.
Through New Age Alpha’s research, they have identified a differentiated source of alpha that is uncorrelated with traditional risk factors and managers, and as the foundation of their investment approach, they have built a range of actuarial-based asset management solutions that aim to mitigate the risk of human behaviour. — Moneyweb.