There was a panel discussion where jazz artist, trumpeter and artistic director of the Jazz at Lincoln Center, Wynton Marsalis, made a point about musical collaboration — particularly when the music styles and philosophies are different.
He discussed the concept of finding common ground and the many ways of finding it. Numerous places are connected by individuals with common ground, but the nature of that common ground is different. For instance, not as an indictment or endorsement of any of these, but you equally find common ground in religious places of worship as you do in a tavern, bar or shebeen. You find common ground in corporate and among entrepreneurs; on the streets and in institutions of education and in various sectors of society. The trick that comes with these different places is finding common ground with each other.
With global listed equity markets excessively volatile and dominated by negative news feeds, including the worst half-year performance in US equities in more than 50 years and the largest inflation print we have seen locally since the global financial crisis more than 10 years ago, we have seen polarising views about policy setting and the direction of markets and the economy. We are in what we believe to be the most advanced times in our existence, yet are faced with so many geopolitical risks and lawmaking that would put aside basic human rights.
Economically, there are heightened fears of a global recession but unemployment in most developed economies is at all-time lows, commodity prices appear sideways but inflation keeps on climbing, market risk and forecast risk is increasing but valuations are improving, local confidence and spending is low from both consumers and businesses but the Reserve Bank keeps increasing interest rates.
Marsalis makes the point that for different musical thoughts, ideas and themes from different genres or even similar genres with differing philosophies in rhythmic construct, harmonic variations or melodies — due to different musical roots or cultural influences — it can be difficult to obtain common ground. The temptation between different artists from different backgrounds becomes for each artist to oversimplify their craft to make it easier for their counterpart to understand, thereby finding common ground by reducing the level of engagement with the art. He argues the best method of finding common ground, is the harder method, whereby none of the artists compromise on their craft, but instead spend time increasing their level of understanding of their counterparts’ art form — and create something that is more meaningful and impactful.
Similarly, we need to seek to elevate our thinking and understanding that these conflicting events and scenarios are not necessarily mutually exclusive, and that they can all coexist. Each one must be evaluated on its individual merits and conclude on its validity as opposed to seeking to assert one against other. We can then weigh them up and consider which will be more influential in global markets over various periods.
In setting investment strategy and asset allocation, navigating this nuance and maintaining a diversified portfolio, which is tilted towards your views, is the best way to protect investment portfolios from huge drawdowns during periods of heightened market volatility, while maintaining upside participation as and when markets rally — as opposed to taking extreme binary views.
We continue to see opportunities in the market, even amid the global volatility and uncertainty. First, we do believe that inflation will cool, barring any further commodity supply disruptions, though there is a risk that it remains elevated longer than markets desire. We, therefore, continue to hold some the resource counters in our portfolios as they provide a decent hedge against inflation, while having decent cash reserves to cushion against falling commodity prices.
We also believe interest rate normalisation will remain the normal order of the day, and this has and may very well continue to add to market volatility — particularly where valuations are stretched. Furthermore, economic activity normalisation from the Covid-19 recovery, may result in a couple of quarters of economic growth. We thus favour more quality stocks, which are less cyclical, including some of the healthcare counters such as Bristol Myers Squibb and AbbVie, which have provided great defensiveness to our portfolios despite these drawdowns.
However, the recent drawdowns, especially in US equities, have significantly improved valuations and provide great buying opportunities for some of the growth counters that have a necessary product in the market, including cybersecurity stocks and semiconductor counters such as Micron Technology, which are dominant within their sector with a strong consumer base and a high quality product.
Indeed, when making investment decisions you typically either get great valuations with decent earnings but heightened risk levels and negative macroeconomic factors, or positive macroeconomic factors and low risk levels with strong earnings momentum but expensive valuations, or some conflicting combination. The problem with waiting for risk levels to subside is that you do not participate on the upside as and when economic factors improve.
Therefore, the common ground in all these extreme views comes in not oversimplifying them and dismissing them, but with an understanding that while we may be uncertain of the future and are experiencing adverse macroeconomic factors over the short to medium term, including the possibility of a global recession, these have occurred many times before in various shapes or forms.
What is important is to structure your portfolio in a manner that you draw down less than markets over the short term and rally with markets when they recover — achieving your long-term objectives.
• Smith is chief investment officer at Absa Stockbrokers & Portfolio Management (acting), and at Absa Global Investment Solutions.
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