Those of us old enough to have been at work on March 10, 2000 didn’t know that we were seeing the peak of the dot-com bubble. The NASDAQ Composite index hit an intraday high of 5,132.52 that Friday, later closing at 5,048.62. Here at home, what was then the TSE 300 had a delayed response — its climb continued another two weeks, topping 10,000 for the first time on March 23.
Something much different followed those good old days. Looking back, it’s difficult not to see the turn of the century as a pivot point after which our relatively stable world turned wobbly.
The World Uncertainty Index (WUI), a fascinating metric based on the Economist Intelligence Unit’s country reports, has tracked this since the first quarter of 1990. Its reports during the decade hovered around the 10,000 mark. It shot up to 16,199 in Q3 1990 as a result of the First Gulf War, settling back down to 7,863 by the end of 1999.
There have been just five quarters in which the WUI came in under 10,000 in the years since. It hit 22,325 in Q1 2000. It rose to 25,156 after the 9/11 attacks on New York and Washington. And the Iraq War pushed it to 34.455.
By the end of 2012, the global financial crisis, followed by Europe’s sovereign debt crisis and the U.S. fiscal cliff drove the WUI to 38,752. Its highest value — 55,685 — came in Q1 2020, as the world locked down in response to the Covid-19 pandemic.
This year’s first-quarter result, following the re-election of U.S. President Donald Trump, was 48,146.
“These are highly uncertain times,” said Indrani De, head of global investment research at FTSE Russell in New York City, in an interview this week. “How markets are behaving has fundamentally changed.”
A head-smacking mix of economics and geopolitics has made portfolio management complex in ways that more than a few asset managers have never seen. De described two key trends — a slowdown in U.S. economic growth that is outpacing that of other countries, and a difference in how the U.S. Federal Reserve is balancing growth and inflation relative to other developed market central banks.
“In Europe, they are more concerned about slowing growth. Inflation is very close to target,” she said. “In the U.S., we are more concerned about inflation. … Because of those trade-offs, how different equity markets are behaving is very different.”
That’s not the only decoupling going on, either. Trump’s aggressive tariff policy has triggered a global trade war that’s restructuring trade flows.
Portfolio hedging
De said we’re also seeing the initial signs of credit stress — that too is more pronounced in the U.S. “You’re seeing very unusual behaviour in U.S. Treasuries and the U.S. dollar, which has huge implications for portfolio hedging right now.”
This has a lot to do with why alternative investments are getting so much attention. Uncertainty may be keeping clients up at night, but it still presents opportunities.
“Gold is a huge outperformer,” she said. “Even copper, because of the green economy transition. Similarly, listed infrastructure is doing very well. The whole decoupling of the world — whether it’s different equity markets, commodities relative to equities and fixed income — it all means there are more diversification opportunities. It’s not a world where everything goes up and down together.”
Canada has done “pretty well” amidst all of this, said De. “It has its challenges, because energy prices are falling. … On the other hand, it has strengths. Things are broadly positive and stable.”
A quarter-century and change after the bubble popped, we are in a dramatically less certain world.
“How asset classes are behaving is different,” said De. “How the correlations are behaving are different, which means that one cannot just look at long-term data from the last 20 years and say ‘these are the numbers, and these are the inputs into portfolio construction.’ Those inputs are changing fundamentally, in very stark terms.”