Ephemeral Stability Amid Instable World

This article was last updated on April 16, 2022

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Notwithstanding quantitative ease and minuscule administered rates including in the United States, Europe and Japan, we see as ephemeral stability in an unstable world. Since 2008 at least, markets appear overly reactive rather than proactively balanced. Political, economic and credit rating developments and in currencies run contrary to complacency about central banks independently maintaining dominance. Politicization appears a risk. Competition is likely to remain fierce even in recovery and contributory to turbulence risk.

Asset diversification needs to have above benchmark cash, alternate assets including precious metals, as well as traditional capital market investments like equities and fixed income. Fiduciary issues are likely to loom. Liquidity problems developed last year in the United States over junk bonds held with leverage and have now surfaced in real estate linked portfolios in Britain. We have above benchmark cash as reserve despite low interest rates. Within fixed income, risks seem lower in high quality corporate bonds in the short to medium term category over junk and emerging market bonds. We also see advantages in smaller currency areas such as in Canada, Norway, Singapore and Australia over for instance Japan or Europe with their subzero yield bonds.

For most equity sectors, competition remains intense on revenue and earnings delivery. Consensus has habitually leant towards earnings being reduced drastically even on the cusp of being reported, then drawing solace. Corporate earnings have been flattening for several quarters and add to risk to such momentum variants, including so-called risk on/off, indexation and valuation expansion. We expect more focus on value as the next likely change including a quality of balance sheet and of operation stance which is not perforce code for marque or large capitalization favor but is instead selective. We expect ephemeral stability and modest global growth as likely to combine with currency volatility into a classical phase of leadership from the United States equity market. On growth, we do differ from past cycles in favoring emerging market equities as early movers. Lately in 2016 however, sector rotation has appeared conflicted, murky and volatile, including as it has both Utilities and gold but not Financials. We see markets as being turbulent but with Financials to be critical to direction, especially those early in restructuring. Restructuring continues in Telecommunications and Oil and Gas, also for overweight. For restructuring, business change and growth, we favor Information Technology over Healthcare. Consumer areas appear pressed by frugality. We would prefer to overweight Industrials on pressing corporate efficiency and public infrastructure needs. Finally and not least amid instability and turbulence, we see precious metals as having a diversification role.

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