Introduction - Angles & Perspectives Q3 2021

Introduction

We have been writing about the phenomenon of built-in extremes within the same system – in this case the market – for some time. The discerning investor seldom sees the market as one entity and realises that from time to time, bifurcations may occur. This fragmentation into quite distinct parts can occur slowly at first, initially creeping into the system almost unnoticed, but eventually manifesting itself in stark and undeniable ways. This offers both risk and tremendous opportunity.

The real question, however, is what to do about it. Extremes are often precursors to significant shifts (or inflection points) in the market, and constructing a strategy around this can be fraught with risk. There are many intricacies and factors at play, not to mention the cacophony of opinions offered by the ‘common wisdom’ and media coverage. Despite the noise, however, none is likely to predict when one should take advantage of non-obvious opportunities with any level of conviction. Navigating a sea change in the markets is tricky, and at the moment, the average investor portfolio is likely to mirror the ‘common wisdom’ grounded in an underlying belief that global inflation and rates will remain low, with all its consequences. Even the savviest investors struggle to get the timing of a wholesale repositioning right at the best of times, with the average investor likely to switch at the wrong time. This risk is amplified even further when a big shift is underway.

In our view, the starting point should be to consider the alternatives (those areas of the market that appear to have let investors down in recent years) and to discuss them, read about them, and consider the scenarios that could materialise. A next step could be to systematically and incrementally introduce this differentiated thinking into your portfolio, rather than to make a wholesale change. As conviction grows, the shift can become more pronounced until the portfolio is more balanced and includes both views. In that way, the overall portfolio risk of either being too skewed to one part of the market in the future or getting a large-scale shift wrong, can be managed. This is often easier when done within a diversified set of managers and with the help of an adviser or a discretionary fund manager. We believe markets are currently at an inflection point, one that requires careful thought (and considered rebalancing) to achieve continued investment success.

In this edition, we analyse some of the key arguments investors should be aware of. Kevin Cousins, Head of Research, expands on the divergence between long and short duration assets, bringing the traditional fixed income measure firmly into an assessment of growth assets. Fund Manager Lyle Sankar unpacks the thinking behind the extremes we are seeing in the markets (notably a belief that developed world inflation and rates will always remain low) and how this impacts the income-seeking investor. And finally, Analyst Ané Craig expands further on the dilemma of the income-seeking investor and offers insights into the ways in which inflation can be beaten without unduly increasing risk.

Market extremes bring great opportunity, and we continue to apply our process consistently to the benefit of our investors. We trust that you will find these articles insightful, and their guidance valuable in these turbulent times.

PSG Asset Management.