Transcript: With changing regimes, investors need to think differently
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we talk about risk mitigation in volatile markets with Leonie MacCann, senior multi-asset portfolio manager, with Irish Life Investment Managers. We asked about regime shifts and risk-management strategies. And we started by asking how investors should view the current environment.
Leonie MacCann (LM): I think the important thing, really, to remember is markets are volatile and cyclical in their nature. And, over time, we do see regime shifts in markets. So, if you think about the decade or so pre-Covid, that was really characterized by low interest rates — and here in Europe, we actually saw negative interest rates — quantitative easing, low (and let’s be honest) stubbornly low inflation, and we also saw peak globalization. Now, it does feel that we’re transitioning to a new world of higher interest rates and higher inflation, where central banks are prioritizing inflation over growth. We’re seeing heightened tensions, globally. And we’ve seen that move from what’s arguably peak globalization to a greater focus on onshoring activities. So, ultimately, I think, we’re in, potentially, a more volatile and polarized world. And with that, there is potential for investment returns to display a fatter tail distribution. There’s going to be greater dispersion and greater dislocation. And that brings risk. But it also brings opportunities. So, in terms of how you invest in this new regime, there needs to be a shift in that mindset. That ‘set-and-forget’ approach that has worked quite well for the last decade is potentially over. But your core investment principles are still going to apply, that can help you see through a lot of that market noise and anchor to your investment beliefs and process. Because, importantly, that can help limit some behavioral instincts taking over and making less-rational decisions.
LM: Risk management is still core. But I think it’s going to be even more important in a more volatile world. Diversification alone cannot manage all risks in this new regime in my view. Your core investment principles would still apply. But we think you need enhancements to that. You need to be dynamic and nimble, to take advantage of opportunities that dislocation and dispersion can bring. Then, secondly, I think it will be important to incorporate active management. Greater volatility will be fertile ground for active managers to add value. And there will also be more opportunities to be tactical, to try and take advantage of those tactical opportunities.
Where she sees opportunities right now
LM: With that aggressive rate hiking that we’re seeing and that move towards what can maybe be seen as rate normalization, we’re now seeing an environment where bonds are back. We’re seeing levels of yields that we haven’t seen in over a decade. So, U.S. and Canadian 10-year yields are at their highest level since 2007. And we’re not just seeing this in certain pockets, but it’s broadly across the breadth of fixed-income assets, with most fixed-income yields at the higher end of their 10-year range. And this does create opportunities. In particular, we like high-yielding areas, like emerging-market debt and high yield, and seeing opportunities there. Another area where we’re seeing opportunities is within equity markets, particularly where we’re seeing greater divergence and valuations across certain equity regions and styles, particularly relative to the U.S. where we’re still seeing quite expensive valuations. So, EAFE equities — which is Europe, Australasia, and Far East, so, essentially global developed market equities ex-North America — and small-cap equities. In part, it’s because of the growth outlook.. We saw last year, in 2022, that negative outlook for growth and the risk of recession. So, we saw small cap fall because they tend to be quite cyclical, and we think being able to allocate to them when they’re trading at discount, when more typically they trade at premium, gives us a good entry point, and as economies recover and you enter in the new cycle, they should be well positioned to recover from that. So, we’re seeing opportunities in both of those.
And finally, what’s the bottom line on investing in volatile times?
LM: The key point for me is that we definitely seem to be in a regime shift. We seem to be transitioning into a more volatile market environment, where there’s potential for more dislocation and dispersion. And in that kind of environment, absolutely your core investment principles and your focus on the longer-term strategic asset allocation is still even more fundamental because you need to be able to see through more market noise. But with changing regimes, you do need to think differently, as well. So, you need to have enhancements and add that to your core investment focus by being flexible and nimble, and looking to try and take advantage of those opportunities that present themselves. But it’s not just one tool. Risk management is most likely going to be even more important, I would think, in this new regime.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Leonie MacCann of Irish Life Investment Managers. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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