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“A year ago, I said, ‘the sun is shining — fix the roof.’ Six months ago, I pointed to clouds of risk on the horizon. Today, the weather is increasingly ‘unsettled’.”
— Christine Lagarde, while serving as IMF Managing Director, April 2019
KEY POINTS
- Going forward, beta alone may not meet investors’ needs as it has in recent years.
- The environment of increased volatility and market stress that we expect may be ideal for global macro strategies, which can potentially play a dual role: as a source of return and diversification.
- We believe global macro manager evaluations should focus on process, investment skill, and repeatability.
THE GREAT RECESSION IS A DISTANT MEMORY. The world’s major economies have long since rebounded, companies have flourished amid a supportive policy backdrop, and asset prices have more than recovered. But we are over a decade into the current business cycle, and there is little doubt that the economic skies have darkened. Measures of global growth and economic activity are in decline, geopolitical uncertainty is rising, real rates are negative, valuations in many markets appear lofty, and volatility — the ultimate gauge of investor uncertainty — has risen off recent lows.
These unsettling financial and economic conditions have prompted investors to reexamine the diversifying elements of their portfolios. A widely embraced attribute, diversification is considered by many to be the only “free lunch” in investing. Yet with few good options out there (e.g., negatively yielding bonds won’t be much help), investors may be left with suboptimal portfolios going into what could be a more volatile period for risk assets.
Global macro investment strategies may help address these and other issues weighing on investors’ minds. Over the long term, successful global macro managers have demonstrated a unique set of investment attributes that we believe can be useful in the current environment. In this paper, we consider the evolving macroeconomic and financial market conditions and offer two important reasons we believe it could be advantageous for investors to add or increase global macro allocations.
The current state of economic affairs
As noted, we are likely in the later stages of the current economic cycle. Global growth is falling amid weakening corporate earnings and business sentiment around the world, leading to declining investment and productivity at a time of already tight capacity. And of course, a range of political and geopolitical wild cards, including the US/China trade war, Brexit, and Middle East tensions, have added to uncertainty and…
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