The last four weeks has tested even the most ardent investor. We have had to face down high inflation numbers, rising interest rates, surging energy and commodity prices and Russia’s war in Ukraine to name a few issues that have roiled markets.
At times like this, it is easy to get carried away with hyperbole, as some pundits even predict the end of the world (I saw a recent research report that put the chances of nuclear war at 10 percent!).
But there are some changes that do warrant attention. We could well be looking at the end of 40 years of globalisation, which led to a virtuous cycle of falling prices, lower interest rates, rising corporate profits and expanding valuations.
The West’s rapid disengagement from Russia will naturally lead to greater investment in domestic energy and food infrastructure, complicate global supply chains and probably lead to a step up in the pace of onshoring of domestic manufacturing capability.
This could well mean an extended period of high energy and commodity prices, which will keep inflation stubbornly high, leading to higher interest rates and falling market multiples.
What does this mean for investors? Firstly diversification is back on the menu, especially in assets that can fight off the downward pull of falling multiples. Look for quality real estate, bonds (keep the duration short) and commodity exposure (goldbugs are back in demand).
Secondly, the high growth highly valued equities that have done so well for the last 10 years may struggle to replicate their performance. The current economic background points to companies that will benefit from the need for domestic investment in energy, food and security. If these companies come along with low PEs and rising multiples, then they could well deliver handsome gains in the coming months and years.
Thirdly, private credit and equity opportunities can be value additions to any portfolio. Getting access to the right deals is critical since information is not so widely shared or verifiable. But governments are likely to do all they can to support economic growth, which will benefit quality private companies in large economies like the USA, Europe and India (to name some obvious ones).
We are living through a period of rapid change. It is easy to doubt one’s instincts and plans. You are not alone. Volatility can be your friend if you are patient enough and have a clear plan in place for when and what to invest in. I wish everyone good investing.
Arjun Mittal is the founder and Chief Investment Officer at Abbey Road IG Multi Family Office, an independent advisory firm. He has worked in the financial industry for 23 years across senior roles in London and Dubai.
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