This article originally appeared on our sister publication, Advisor.ca.
The global economy is being run very poorly. Things are so bad that portfolio managers will need to build bomb shelters to keep assets safe.
These sentiments were expressed by financial experts at a panel discussion organized by the Alternative Investment Management Association Canada.
Attempts made by governments and central banks to spur economies have backfired, says Nandu Narayanan, chief investment officer (CIO) with Trident Investment Management, LLC.
“Liquidity injections by central banks over the past few years have achieved little,” he says. “All they have done is made middle-class and poor-class populations poorer. In the process, the moneyed classes, the ones that screwed the system, got a lot richer.”
As well, banks, the source of many global financial problems, have grown bigger and have a lot more political power, he adds.
The endless stream of shocks will inevitably lead to a complete collapse of the global financial system and social unrest, glimpses of which can be seen in Europe and some developing countries.
“[The world has] lurched from crisis to crisis since 1994,” says Narayanan, referring to the Mexican crisis, the Asian crisis, the NASDAQ bubble, Enron and the real estate collapse. “All these things that were supposed to happen once in a million years, according to the Wall Street model, are happening every three years. [And] every single time it has required even more monetary heroin, printing and [other] regressive [measures].”
As a result, he says, markets, which are supposed to reflect reality, are a distorted mess with no bearing on reality.
The panel identifies currency wars as a macro event that can potentially deteriorate the global investment environment.
Having run out of means to spur inflation, countries are now engaged in currency manipulation leading to conflicts, says Michael Hyman, president, CEO and CIO of River Plate House Capital Management.
“The only way the Japanese can create inflation—they can’t do it with interest rates or their bond markets—is with their currencies,” he says. “They have to weaken their currency, allow inflation to be imported [and] make their exports more competitive. The supply chain will benefit from all of this.”
In such an environment, says Hyman, portfolio managers need to ensure they’re seeking and securing the highest real return. Compounding principal and interest are the types of things that will keep investors ahead of purchasing power risk.
Monetary manipulations of the developed world have far-reaching effects.
They are impacting emerging economies that are responsible for about 75% of the global growth, says Ray Carroll, CIO with Breton Hill Capital Management.
“Their currencies rise and fall; if they cut interest rates, they will see a tsunami of inflation being imported into these countries,” he adds. “Emerging markets really have their hands full.”
Carroll warns that the greater the developed world deflates today, the more it will inflate tomorrow.
But, he says, despite the gloom and doom scenario, there are global opportunities and pockets of value that portfolio managers can exploit.
He identifies Mexico, Brazil, Israel and Australia as geographies where middle-class consumers are expanding, and this creates potential for growth.
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