Heraclitus, an ancient Greek philosopher, said the famous words – “The only constant in life is change”. If he would have seen the pace of change in the 21st century, he would have been astonished beyond his wildest imagination. The accelerating pace of change has encompassed all industries including investment and asset management. Only the one who constantly adapts and innovates will succeed. This is especially true for the decade 2020s, which is likely to take investors through a roller coaster.
The world as it stands today looks very different from the world that it was before the appearance of the COVID-19 pandemic. Since the early 2020s, the world has witnessed the panic of Mar-2020 and then the market boom that started in April-2020 driven by unprecedented quantitative easing by central banks across the world. Just to give an example, The Federal Reserve of the USA had US$8.94 trillion of assets on its balance sheet as of April 26, 2022, up from US$4.17 trillion on February 19, 2020. While the COVID-19 virus continues to play hide and seek to keep policy planners still awake in the night worrying about full economic recovery, the central banks around the globe now look out of breath after sustaining two years of quantitative easing. At the same time, Russia decided to add more fuel to the fire by starting off a military conflict that no one wanted, and no one was prepared for. So, inflation is raging, whether it’s food or energy or pretty much everything, and the balancing between growth and inflation is increasingly looking like a hot potato.
The only foregone conclusion is that the central banks will increase interest rates, in fact, a few major ones have already started including USA and India and start quantitative tightening as well. God willing, this can go right, and the world may come out of this unscathed, but if this goes wrong, there would be multiple bazookas chasing investors across the globe. The obvious one is the end of the 40-year bull run in bond prices. Growth stocks will also come under severe pressure driven by earning declines in businesses along with a likely stagnation in real estate with an increase in mortgage rates. The balance sheet of banks may start getting stretched and the leveraged investment products may just realize the full extent of havoc that leverage can create on the downside.
What does this mean for investors? Risk management is going to be the key in the current environment and the traditional equity, fixed income, real estate, and leveraged products are likely to prove inadequate. As Warren Buffet, the oracle of Omaha puts it – “Inflation swindles almost everybody, from stock and bond investors to cash hoarders and the mitigation against inflation is your skill”. The skill of the fund manager that investors choose is of critical importance. Investors need to gravitate toward absolute return products, helmed by a competent fund manager with a comprehensive track record of product innovation and experience in seeing through market cycles. Generation of absolute return requires the ability to understand and operate varied businesses that are essential to create an absolute return investment strategy through a global and dynamic asset allocation.
I come back to the first point – adapt and innovate. After all, innovation is the ability to see change as an opportunity and not a threat, aptly put by one of the legendary innovators of our times, Mr. Steve Jobs.
