Macro survey: Nervous about China

Every quarter for the past six years, the Wisdom of Wellington team has surveyed around 100 of our Wellington colleagues across different investment disciplines and locations to get their views on what we see as the key macro questions of the day. The results can pinpoint where the firm’s views differ from the consensus and can also reveal significant shifts in our collective thinking.

At the start of each year, we ask our colleagues which risks they think the market is most complacent about. This can help us to identify areas where the markets are mispricing risk and thus creating opportunities.

The latest survey reveals that the top underappreciated risks for 2022 were China and oil prices over US$100 a barrel, followed by the retrenchment of retail investors, in third place (Figure 1). Concerns related to monetary policy took the number four and five spots, while COVID risks — last year’s number one — came in fifth.

Nervousness about China percolates through the survey, along with concerns about emerging markets (EMs). EMs and China are the least preferred equity markets, while respondents also flagged the risk of high spreads in sovereign EM debt and persistently wide spreads in Chinese high-yield corporates. 

Some may be surprised that oil over US$100 a barrel is one of the top risks. But this also reflects the possibility that a fresh Russian military incursion into Ukraine could drive energy costs higher.

The potential for a big upside surprise in US inflation remains an elevated risk, but the level of concern has fallen appreciably since last October’s survey, with the median probability down from 62 then to 43 now. That chimes with the views of our macro team in recent months.

Superforecasting in practice

The Wisdom of Wellington Macro Study originated from a conversation three of our macro thinkers had over five years ago about Philip Tetlock and Dan Gardner’s book Superforecasting. Tetlock and Gardner argue that forecasting is a skill which can be improved, and we thought their theory could work well in practice at Wellington, given the firm’s collaborative culture. The hope was to sharpen our collective and individual forecasting skills, enhance our internal investment dialogue, reveal where our views differ from the market consensus and identify how they change over time.

In January 2016, we launched an internal survey of macro thinkers across all disciplines, asset classes and office locations. The responses are anonymous. The precise formulation of the questions is important. Wherever possible, they are precise, time-bound, measurable, probabilistic and rollable from one quarter to the next, giving us a richer data set over time. We are assisted by Investment Strategy Analyst Alex King and Research Associate Allison Liegner.