This session looked at the biggest risks that asset owners are facing in this environment over the next 2-3 years as a result of the major shifts to near-zero interest rates, coordinated monetary and fiscal policy (MP3), and heightened internal and external conflict. It examined how the move to MP3 has significant implications for how investors manage risk and construct portfolios going forward. In an MP3 world, direct government spending rather than mostly efficient markets will be a much larger influence on the investment assumptions we take for granted, the drivers of growth and inflation, the flow of liquidity and how it impacts the cash flows of each asset, the pricing of the assets, their discount rate and the currency they’re denominated in.
Click here to view Bob’s presentation slides[vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Bob%20Prince%20%22%2C%22job_role%22%3A%22Co-CIO%2C%20Bridgewater%20(United%20States)%22%2C%22content%22%3A%22Bob%20Prince%20is%20co-chief%20investment%20officer%20for%20Bridgewater%20Associates%2C%20responsible%20for%20managing%20the%20company%E2%80%99s%20investment%20process%20with%20Ray%20Dalio%20and%20Greg%20Jensen.%20During%20his%20tenure%20at%20Bridgewater%2C%20he%20has%20been%20a%20partner%20in%20developing%20all%20aspects%20of%20Bridgewater%E2%80%99s%20investment%20process%20and%20client%20strategies.%20Prince%20got%20to%20know%20Dalio%20and%20Bridgewater%20in%20the%20early%201980s%20when%20he%20headed%20the%20Treasury%20Department%20of%20First%20National%20Bank%20of%20Tulsa%2C%20in%20Tulsa%2C%20Oklahoma.%20Before%20joining%20Bridgewater%2C%20for%20three%20years%20Prince%20used%20Bridgewater%20as%20his%20off-campus%20research%20staff%20in%20managing%20the%20bank%E2%80%99s%20funding%2C%20asset%2Fliability%20management%2C%20and%20investment%20portfolio.%20He%20holds%20a%20Bachelor%20of%20Science%20degree%20in%20Finance%20and%20Accounting%20and%20an%20MBA%20from%20the%20University%20of%20Tulsa.%22%2C%22image%22%3A%2244352%22%2C%22linkedin%22%3A%22%22%7D%5D” title=”Speakers” el_class=””][vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Colin%20Tate%20%22%2C%22job_role%22%3A%22Chief%20executive%2C%20Conexus%20Financial%20(Australia)%22%2C%22content%22%3A%22Tate%20has%20been%20an%20investment%20industry%20media%20publisher%20and%20conference%20producer%20since%201996.%20In%20his%20media%20career%2C%20Tate%20has%20launched%20and%20overseen%20dozens%20of%20print%20and%20electronic%20publications.%20He%20is%20the%20chief%20executive%20and%20major%20shareholder%20of%20Conexus%20Financial%2C%20which%20was%20formed%20in%202005%2C%20and%20is%20headquartered%20in%20Sydney%2C%20Australia.%20The%20company%20stages%20more%20than%2020%20conferences%20and%20events%20each%20year%20%E2%80%93%20in%20London%2C%20New%20York%2C%20San%20Francisco%2C%20Los%20Angeles%2C%20Amsterdam%2C%20Beijing%2C%20Sydney%20and%20Melbourne%20%E2%80%93%20and%20publishes%20five%20media%20brands%2C%20including%20the%20global%20website%20and%20strategy%20newsletter%20for%20global%20institutional%20investors%20conexust1f.flywheelstaging.com.%20One%20of%20the%20company%E2%80%99s%20signature%20events%20is%20the%20bi-annual%20Fiduciary%20Investors%20Symposium.%20Conexus%20Financial%E2%80%99s%20events%20aim%20to%20place%20the%20responsibilities%20of%20investors%20in%20wider%20societal%2C%20and%20political%20contexts%2C%20as%20well%20as%20promote%20the%20long-term%20stability%20of%20markets%20and%20sustainable%20retirement%20incomes.%20Tate%20served%20for%20seven%20years%20on%20the%20board%20of%20Australia%E2%80%99s%20most%20high%20profile%20homeless%20charity%2C%20The%20Wayside%20Chapel%3B%20and%20he%20has%20underwritten%20the%20welfare%20of%2060%2C000%20people%20in%2028%20villages%20throughout%20Uganda%20via%20The%20Hunger%20Project.%22%2C%22image%22%3A%2244341%22%2C%22linkedin%22%3A%22https%3A%2F%2Fwww.linkedin.com%2Fin%2Fcolin-tate-839a5a181%2F%3ForiginalSubdomain%3Dau%22%7D%5D” title=”Moderator” el_class=””][vc_empty_space height=”10px”]
Key takeaways
Bridgewater’s Bob Prince explains the perils of MP3 and suggests shaping strategies around cash-flow yield and connecting equity cash flows to stable sources of spending in the economy.
Today’s MP3 world where monetary and fiscal policy work hand-in-hand has resulted in important secular shifts.
Under MP1, interest rates were the driver, used to change levels of borrowing and lending to alter spending habits. Under MP2 QE became the main tool whereby governments printed money to drive up asset prices.
Under MP3 the Fed borrows and directs money into the economy wherever it wants, supplementing incomes and raising spending.
Now governments are trying to suppress interest rates so as not to offset the stimulation from the fiscal side. It means that the goal has become to hold interest rates stable so as not to conflict with the “person on the accelerator”.
This shift in linkages has big implications.
Asset holders are on the wrong side. Holders of cash have lost their purchasing power. Cash and bonds are no longer a saving vehicle.
Central banks now only playing a support role to governments, heavily involved in markets.
Investors need to think differently and get returns through cash flow yields. It is possible to create a tracking portfolio of stable sources of spending in the economy.
Stable cash flow streams still get price volatility, but it is possible to hedge this.
Through this lens public and private assets are on the same plane.
However, zero interest rates, deficits and printing money, doesn’t exist in Asia. It makes investment in Asia another source of diversification and investors should move between east and west.
The big difference between the vaccine rollouts and the scale of the stimulus measures across the world could result in a K-shaped global economic recovery, with much of the developed world booming but poorer countries continuing to struggle. However the
Investors discuss how technological change and the new green economy is re-pricing assets in infrastructure, as well as the trend to substitute fixed income with infrastructure debt. But investors should not to lose sight of traditional infrastructure characteristics in their quest to tap new trends. Predictable cashflows and downside protection remain central.
Research that looks at the relationship between economic transparency and defining investment qualities such as yield spreads, credit ratings and stock price volatility shows sovereign transparency helps improve the value of assets, enables countries to lower their borrowing costs and achieve a better credit rating.
Inflation holds investor opportunities as well as perils. Emerging markets, commodities and linkers do well in a climate of rising prices while central banks are likely to act quickly and aggressively in response rather than early or gradually.
The unprecedented level of government debt signals sub-par economic growth ahead, warned Farouki Majeed, chief investment officer, Ohio School Employees Retirement System speaking at FIS Digital alongside Rich Randall, head of global debt at IFM Investors.
Inflation is the number one investor concern and whether it is here to stay was the subject of much debate at the Fiduciary Investors Symposium. While its longevity is contested it was agreed that its presence has important implications for the correlation between bonds and equities which creates problems for portfolio design. Investors at PGIM, QMAW, CPP Investments and NEST discuss.
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