Mac attack – Could you trust anyone to call the macro outlook well enough to build a portfolio?
Were The Value Perspective to appear on Mastermind, it is unlikely our specialist subject would be macroeconomics. That does not stop us reading up on the subject, however, and one personal favourite among market commentators – because he is his own man, he is very consistent in his views and those views often drive other members of our team up the wall – is Societe Generale strategist Albert Edwards.
For the best part of two decades, Edwards has written many variations on the same theme, arguing the case for being overweight bonds and underweight equities. To be fair to him, since bonds have broadly thrived over this period while equities have derated, this viewpoint has in macro terms been a pretty good call.
In the most recent piece we read, Edwards argues the world is heading for a period of strong deflation, which can be defined as a reduction in pricing over time caused by a number of economic factors. Key planks in his case include China exporting deflation to other parts of the world, the threat of deflation in the eurozone and the US seeing much lower levels of inflation than is generally thought.
As we admitted at the start, macroeconomics is not our strongest suit but, on the basis of what we do understand, much of the picture that Edwards paints for his readers seems eminently plausible. But then again, could the same not be said for a lot of the arguments that have the world heading for a period of strong inflation?
For starters, history suggests any programme of money-printing or other loose monetary policy over an extended period of time leads to inflation and this is backed up by some fairly uncontroversial economic equations. Even less controversial would be the suggestion that we have just been living through some of the loosest monetary policy financial markets have ever known.
While rampant inflation can hardly be said to be evident in, say, nominal wage growth in China or the US, there is certainly a case to be made for it creeping into other asset classes – UK residential being an example close to home, so to speak. And yet respected commentators are talking about the risk of deflation tearing the global economy apart. What gives?
Clearly there are plausible arguments both for and against inflationary and deflationary scenarios of one degree or another – and indeed, like any good economist, Edwards actually hedges his bets by saying that we are only initially heading for a damaging period of deflation before ending up with rampant inflation.
All of which raises some pertinent questions for investors – not least, why would you rely on macro forecasting when constructing a portfolio? Who could possibly navigate all the complexities to call this sort of thing correctly, let alone get the timing right? And that is before you even get into assessing what it all means for the actual assets themselves and whether or not they are priced correctly.
The more one gets to know about economics, the more one understand why it is known as ‘the dismal science’ – although of course it is not really a science at all. Economics might more accurately be described as a set of opinions – along the lines of: “We think global GDP will be X% next year although, even when we get there, we won’t know what the real figure is. Then, four years down the line, we will use hindsight to revise our initial figure and then, after maybe a decade, we might finally know for sure what GDP was 10 years ago. Mind you, we still won’t know why.”
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
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