A global macro strategy seems the place to be in the current extremely volatile stock market climate. But beware, if you do not combine global macro with micro factors, you are doomed to fail, says Christopher Govaerts (photo), chief strategist at Belgian private bank Nagelmackers. Specifically, British equities and emerging markets such as China and Brazil now offer a counterweight.
Govaerts has over twenty years of experience in macro-economic analysis and portfolio management and also uses this knowledge for the portfolio management of the private portfolios and funds, which is organised through an investment committee of which he is the chairman.
He cautions: “Pure global macro strategies are always the worst students in the class. Always. If you do not combine macro input with micro input, you are doomed to fail. Just look at the performance of macro hedge funds, which have almost always been at the bottom of the league table over the years. No macro hedge fund saw the financial crisis of 2007-2008 coming. You have to look deeper under the bonnet and also use other micro-indicators such as relative valuation and investment flows. Styles such as value vs. growth and large/mid/small caps also fall into this category.”
Measures
Govaerts and his team had already taken measures in the portfolios in December and January. Every asset manager had imagined 2022 to be relatively calm, with a steady recovery after the Covid period. Things turned out differently when inflation soared, central banks faced deadlock and the crisis between Russia and Ukraine erupted. Govaerts points out that the situation changed completely in one week. “In January, the Fed suddenly changed its tone. The ECB too has had to turn its back and admit that inflation is not temporary.”
A 50bp rate hike by the Fed in March is almost certainly out of the question. While that probability was 90 percent a week ago, it is now down to 10 per cent. It will probably only be 25bp.
Although this is not Nagelmackers’ base scenario, Govaerts does not want to rule out the limited risk of a stagflation like in the 1970s. “This situation cannot be allowed to continue for too long. If it escalates further, the stagflation story becomes tangible,” he said, underlining that this would be a worst-case scenario.
Sharply rising commodity prices are associated with stagflation risk. Stock markets with high commodity exposure, such as Brazil, which is up 8 percent since the start of the year, are one of the few positive stock markets worldwide.
Challenge
The portfolios have a real challenge to stay invested at this time. They are not heavily underweight in equities, but the overweight positions have been reduced. Emerging markets and China remain a conviction. Exposure was also shifted from Europe to the UK, a low-cost market with a fairly large exposure to energy and commodity companies. The UK offers investors a natural hedge against inflation within the equity universe.
“In bonds, we are strongly underweight, even more so than last year. Instead, we are going to be more heavily committed to our multi-strategy pocket, which accounts for 10 percent, and where we can also go up to 20 percent. These are both third-party and proprietary funds that you cannot and should not place under traditional asset classes. We are thinking for example of convertible arbitrage, inflation expectations, long-short strategies and gold.
“In the equity section, you can also bet on low-vol (low volatility) strategies.”
When asked whether this can be combined with the increasing trend towards ESG, Govaerts gives a nuanced answer. “It is a double-edged sword. On the one hand, flows towards ESG are now growing strongly and it is becoming increasingly important. It is therefore more difficult to justify strategically, for example, investing in oil shares. On the other hand, as a manager you also have to be pragmatic, because ESG assets are becoming increasingly expensive. A certain creativity is therefore required.”
Geopolitical
Govaerts has a cash position of 10 percent that he can deploy, but is still waiting to see what happens. “This was not a totally unexpected raid, like Saddam Hussein’s raid on Kuwait and the 9/11 attacks. That is why it is still possible that the recovery will be substantial and fast. But this is not a given, as this conflict could escalate further. The longer this situation drags on, the greater the risk of stagnation/stagflation. But on the other hand, I do not want to be a Cassandra. So it is not our basic scenario”, Govaerts said.
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