Complex times, simple strategy

Newsletter by Belal Mohammed Khan
Published on 15th September 2022

The greater the complexity, the greater the need for agility. This truism applies to everything, including, of course, asset allocation and portfolio strategy.

As the world moves forward, perhaps from the ‘Long Peace’ to a new era, and markets move forward beyond the policy-supported period of the Fed Put and COVID-19 fiscal policy support, the world’s complexity has become more visible.

From geopolitical shifts and fragmentation, portfolio managers have had to quickly figure out the market implications of a new world that most have not lived through. Very few of us were surfing these markets or even alive back in the era before the Long Peace or even the Cold War.

While the investing environment has become more complex and is likely to remain, complexity does not require a complex response. Instead, it requires rapid adaptability and agility. Our portfolio strategy has been agile, adaptive, and straightforward.

Our focus and preference lie in isolating strong, quality leadership at the state, central bank, and industry levels. Our strategy that quality will prevail in a complex world with dwindling support structures (monetary and fiscal policy) is simple and effective. A central, fundamentally important strategy in this new era. This new era of elevated uncertainty will result in elevated market volatility, and markets will experience more frequent shocks. Indeed, this new normal provides further support for using market volatility as an important asset class in diversified portfolios.

Meanwhile, central banks will remain vigilant and do what is needed to get inflation towards their targets. While most central banks have been tightening monetary policy, they have not been moving at the same speed nor with the same size of policy rate hikes.

Our “pockets of opportunity” strategy calls for opportunistic allocations to countries in which central banks have been quick, nimble, and shown greater forth sight. Thus, they are “ahead of the curve,” and these select countries now have more attractive local and hard currency bond markets. In addition, these economies also have increasingly attractive equity markets given valuations, dividend yields, sector composition, and responsive central banks. The strategy also is aimed at beneficiaries of secular inflation; this includes net commodity exporters and winners from the transformation of global trade as the world moves beyond globalization to regionalization.

Regarding our current asset allocation, we are nearly full overweight on cash, overweight on China and US government bonds (medium duration), and underweight on equities. Within our equity allocation, we favor defensive markets and sectors with a strong value style tilt over the growth style. Our portfolio is also overweight on volatility, gold, and agriculture while underweight on hedge funds. Within our hedge fund allocation, we favor global macro, Systematic/CTA, and equity long-short. Our investment strategy has had an equity allocation hedge overlay since April. Indeed, a nimble simple investment strategy in very complex times.

Central Bank Monetary policy dev tool

Table 1: As complexity rises, being agile becomes a necessity. Our country central bank table above is a tool we use to stay abreast of monetary policy developments across most of our investable universe.  Central banks which have been quick to move will help their economies faster. The data below is as at August 2022 end.

Important notice

The information provided herein constitutes marketing material, that may contain general information, and has been prepared by personnel in the GMG Investment Solutions SA or GMG Institutional Asset Management SA (collectively “GMG”) and is not based on a consideration of the prospect’s circumstances. This document reflects the sole opinion of GMG or any entity of the GMG Group and it may contains generic recommendation.

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This document is not the result of a financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association.

This document is neither a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other exchange or regulated trading facility in Switzerland, nor a simplified prospectus, key investor information document or prospectus as defined in the Swiss Federal Collective Investment Schemes Act. Any benchmarks/indices cited in this document are provided for information purposes only.

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