Investing is both a science and an art.
Over the last few months, I have been asked umpteen times which way is the market headed? What exactly is going on and when will this madness end? Like most things in life, most journeys do not have short cuts and essentially there is no short answer. To understand this current environment and more importantly profiting from it requires Objectivity, Knowledge, Patience and Guts. But above all you will need money!
Investing is both a science and an art. Science, because it takes process, system and discipline and an art because it needs flair, tact and resourcefulness.
The investing world has changed dramatically in many ways over the last decade and the pace of change has only accelerated in recent years. The easy money or low hanging fruit has essentially been gobbled up by Superfast computers, Advanced telecommunication systems etc. The basic arbitrage trades have vanished in this highly networked environment.
Years of economic malaise compounded by the Covid 19 pandemic has badly hit economies and central banks have been forced to reduce the Interest rates to very low levels (in case of Europe even negative rates). The resultant bond buying programs from most developed market central banks have led to bond yields falling dramatically. This situation has created ripples throughout the investment landscape. From simple savers to large pension programs, they have all been affected by the lack of Interest rates and these will continue to have a long term impact.
To put things in perspective, one needs to be able to see through the sifting sands of economics and time and adjust their strategies accordingly. One shall have to develop a view and a objective philosophy towards the markets and invest.
Presently the markets are giving away very little but certain signs are fairly deducible:
- Low interest rates mean the Fixed Income bias of the last few decades has to go.
- Return profiles have shifted downwards dramatically.
- Cost of money and inflation is likely to remain low over the medium term.
- Hegemony of currency bias away from US Dollar to new currencies like Chinese Renminbi and other emerging markets along with Crypto Currencies.
- The advent of highspeed algorithms capable of a multitude of transactions in seconds is causing tremendous volatility in the markets whilst also enriching the depth and volumes.
Given the above circumstances and facts, our approach to investments on a macro basis is as follows:
- US Dollar: Whilst the Dollar is likely to remain the reserve currency of the world for a long time, other currencies and instruments will continue to chip away on its dominance. The ballooning of the Federal Reserve balance sheet and the lack of real inflation will force Fed to keep the interest rates lower and hence the Treasuries and other fixed income instruments are unlikely to yield much. The Spreads against other higher risk geographies and credit has also been adjusted as such and therefore funds are being tapped quite cheaply by even deemed higher risk companies and countries. We continue to watch with great caution this entire space as it will give interesting opportunities in the emerging markets on a risk adjusted basis.
- Gold: We are extremely bullish on Gold due to the fact that low interest rates have removed the anti gold bias. The statement “There being no Carry for holding cash instead of Gold”, has finally died. The weakness in Dollar and the move away from it makes Gold the go to commodity. We believe the price could end up close to USD 3000 per Oz. within a year.
- Oil: There is plenty of oil in this world and we are not going to need it! Our view is bearish on Oil as global producers get better and better at producing oil from difficult terrains and it becomes cheaper to store and transport it. The rise in environmentally conscious consumer has also created a renewable energy bias. We believe Oil could slide towards mid 20s to early 30s in USD per BBL.
- Equities: Equities will be the go to asset class in the near future. The combination of low interest rates and changes in consumption patterns will create interesting opportunities in equities but finding the diamonds amongst the heap of rubble is the key to profits. There are several themes being played out including in technology, energy and other sectors. We believe in investing in good solid businesses with good cash flows and growth. Our investment philosophy in equities is for the medium to long term and there continue to be very interesting opportunities in the market.
Any investment carries risk but smart investing with clarity of purpose and goals help investors in maximising returns without giving them sleepless nights. Clarity and Patience help in avoiding the twin devils of Fear & Greed.