Achieving investment success beyond the snow globe
Anet Ahern, CEO at PSG Asset Management
The year to date has certainly tested the resilience of investors, and there is no sign that the current market volatility is about to abate. While we anticipated that global imbalances would have to unwind at some point in time, there can be little doubt that the current upheaval is causing much discomfort for investors. Part of the unease arises from the fact that traditional safe havens are proving far less secure than previously thought: global bonds markets recently saw their first bear market in over forty years. It is quite sobering to think that a whole generation of bond investors have not experienced a global bond rout before.
As artificial as a snow globe?
After the Global Financial Crisis (GFC) in 2008/9, central bankers maintained easy monetary policy to stabilise a fragile financial system. When the Covid-19 pandemic happened in 2020, central bankers and governments responded by pouring further liquidity and fiscal stimulus into an ailing global economy. Access to easy money causes people to assess risk differently than they would when money is scarce, and, as it turned out, this time was no different.
In a sense, excess liquidity and artificially low interest rates had created something of an artificial environment. Think of this as the ‘snow globe’. Inside the easy cash, low interest rate snow globe risk and speculative assets thrived, while value strategies and short duration assets seemed dull, outdated and boring. Now that higher inflation rates and normalising interest rates are exerting pressure on the snow globe, the artificial bubble environment is starting to deflate and investors are realising it’s the dull, outdated and boring world outside that is actually real.
The unwinding of the imbalances built since the GFC was never likely to transpire smoothly, but volatility has been exacerbated further by stubborn inflation, geopolitical uncertainty, and arguably the rise of the polycrisis environment. All of this has made for a rather difficult time for investors. Few reality checks ever turn out to be pleasant. Now, investors are facing the painful task of reassessing their investment strategies against the backdrop of an environment they were not designed to navigate.
Focus on the opportunities
Investors will be faced with the very real challenge of building wealth in an environment that has brought new challenges, most notably stubborn inflation and ongoing volatility. No wonder some are tempted to simply sit this out in cash, where inflation is sure to eat away at their wealth stealthily over time. In our view, this would be the wrong approach.
We have a strong view that there are always opportunities in the market, provided that you look beyond the short-term noise and prevailing narratives. Ironically, these opportunities tend to appear at times like these, when expectations have been shaken to the core. The danger, however, is that investors rely on what has worked previously, when the snow globe is already a shattered relic of the past. Those who do not adapt their investment strategies to the new realities, may find their ability to grow wealth successfully into the future severely compromised.
To succeed, investors will not only have to uncover opportunities that are suited to an investment environment that looks very different to that of the past decade, but they will also need the conviction to pursue those opportunities despite high levels of discomfort and noise. In seeking to navigate the world beyond the snow globe successfully, investors would be well served to partner with differentiated thinkers who construct portfolios with long-term outcomes in mind and to ensure that their overall strategy includes a truly diversified opportunity set.