Introduction - Angles & Perspectives Q1 2023

Introduction

The recent bout of global financial sector instability is visible evidence of the impact of a tightening interest rate environment. At a deeper level, however, we believe it is also a sign that the ‘big unwind’ is in progress.

For more than a decade, highly accommodative monetary policy caused distortions in capital allocations across the globe and, in a self-reinforcing loop, also drove up prices of assets that benefited from a low interest rate environment. However, a normalising interest rate environment will drive returns from a different set of assets than those that enjoyed popular support over the last decade. As markets seek a new equilibrium, fault lines are beginning to emerge as support is withdrawn for investments whose attractiveness was predicated on a continuation of the low inflation environment. While it may be impossible to predict where the next fault line will emerge as long-held distortions unwind, we anticipate that investors will have to be prepared to face continued uncertainty for some time.

Nevertheless, in the midst of this painful process, we believe opportunities are emerging for astute investors, provided that they do not fall into the trap of simply opting for the investments that fared well over the past decade. We believe that investors need to partner with differentiated thinkers who are well positioned to look beyond the short-term noise and find investment opportunities suited to an investment environment marked by higher interest rates. We believe our 3M philosophy, with its emphasis on investing in quality companies at below their intrinsic value, puts us in an exceptional position to identify and maximise such opportunities for our clients.

In the first article Building on fault lines, Head of Research Kevin Cousins argues that some pockets of risk are being exposed as interest rates rise and macro volatility increases. However, these events are most likely symptoms of the deeper underlying problem built up over the long period of low rates and suppressed economic volatility. In the decade-plus hunt for yield, very substantial duration risk has been accumulated across the financial system. We liken this to, for example, building cities in a flood zone because the last disaster was so long ago, its consequences have been forgotten.

In the second article, Assistant Fund Manager Ané Craig and Head of Fixed Income Lyle Sankar explore our globally integrated approach to fixed income investments. Looking at investment opportunities through a global lens improves our understanding of the potential range of outcomes, both negative (the left tail) and positive (the right tail). There seems to be significant complacency in local fixed income markets, which presents an opportunity to enhance risk-adjusted returns and add to portfolio diversification through a global approach.

Finally, in Identifying potential as fault lines begin to show, Co-CIO John GiIchrist explains why we remain positive about our portfolios’ ability to generate appealing long-term returns despite the currently gloomy macro backdrop. We believe the current challenges obscure the opportunities available in large parts of global markets to buy quality stocks at extraordinarily low prices. The catch, however, is that you have to be prepared to take a differentiated view and invest in areas of the market the majority of investors have shunned over the past decade.

We trust that you will find these articles insightful, and their guidance valuable in these turbulent times.

PSG Asset Management.