09 May 2024

In today’s rapidly evolving global world, investors face unprecedented challenges and risks. From geopolitical tensions to economic uncertainties, navigating the markets requires a keen understanding of the current environment and the tools available to mitigate risks. In this blog post, we’ll explore key insights from a recent webinar held by Tabula CIO Jason Smith & Head of Risk Francesco Romano on navigating uncertainty in the global markets and discuss strategies investors can employ to navigate these turbulent times effectively.

Setting the scene: understanding current challenges

We live in an era marked by uncertainty, with geopolitical risks and tensions on the rise. The pace of globalisation has slowed since the financial crisis, making the world less resilient to shocks. Governments have taken center stage in financial narratives, implementing large spending plans focused on energy security, clean energy, and defence. Key initiatives include the Inflation Reduction Act in the US, the “Chips Act,” and “Next Generation EU.” Additionally, crucial elections in major democracies and the renewal of the European Parliament add to the complexity of the global macro-environment.

Inflation and monetary policy

Central banks implemented significant rate hikes in response to inflation concerns, leading to a reassessment of market expectations. Sticky inflation, coupled with expansionary fiscal policies and rising debt levels, has resulted in market repricing. The persistence of inflationary pressures has challenged previous market forecasts, impacting investment strategies and market dynamics.

ESG Considerations in a changing market

While geopolitical and economic risks are in the spotlight, environmental, social, and governance (ESG) factors remain crucial considerations for investors.

Recent trends have shown a slowdown, primarily attributed to regulatory uncertainty. Notably, assets in Article 8 and Article 9 funds have respectively seen stagnation and limited uptake.

The surge in government spending, coupled with escalating regulatory frameworks, underscores the synergy between ESG guidelines and broader policy objectives, extended to emerging markets like India and China (see Newspapers snippets). Despite regulatory challenges and overshadowing global events, ESG investment remains fundamental.

Evergrande’s example in China’s real estate sector highlights the role of governance within ESG frameworks. Despite comparing relatively well to its peers on environmental and social metrics, Evergrande performed poorly on governance metrics, leading to the change in allocation within our Asia High Yield portfolio – see illustration.

As governments increase spending and markets regulation, aligning with ESG guidelines becomes increasingly important. By incorporating ESG criteria into investment strategies, investors can better manage uncertainties and align with broader market trends.

Toolkit available for investors and portfolio managers

By leveraging insights from global markets and incorporating ESG considerations, investors can navigate uncertain times. From geopolitical diversification to managing interest rates and inflation, understanding these tools is essential for making informed investment decisions.

Gold as a hedge

Gold has long been recognised as a geopolitical and currency hedge, particularly in times of uncertainty. Central banks, especially those in emerging markets, are significant buyers of gold, influencing its demand and price. However, it’s crucial to consider the provenance of gold, especially ESG considerations. Historically, a significant percentage of gold has come from countries with poor ESG scores, such as Russia.

Geopolitical diversification with India

Investors and portfolio managers can also consider geopolitical diversification, with a focus on emerging markets like India.

With a young and growing population, India presents significant growth potential, potentially surpassing China in economic growth by 2024 as per IMF Growth forecasts. Additionally, India’s inclusion in major emerging market indices indicates growing investor interest, with substantial allocations expected in Indian government bonds.

 

 

Managing interest rates and inflation

Fixed income  investors can employ tools to manage interest rates and inflation expectations effectively. Strategies that incorporate both inflation expectations and realised inflation, such as Treasury Inflation-Protected Securities (TIPS), can help mitigate inflation concerns. Additionally, investing in shorter duration strategies, particularly in corporate bonds, offers a yield pickup with low default rates, providing liquidity and helping mitigating duration risk.

In an environment characterised by uncertainty and rapid change, understanding market dynamics and employing effective risk mitigation strategies are essential for investors. From gold as a hedge to geopolitical diversification and managing interest rates and inflation, investors can adopt a strategic approach to mitigate risks and capitalise on opportunities effectively.

Watch the webinar recording now here.

About the authors

Jason Smith, Chief Investment Officer

Jason Smith is Chief Investment Officer at Tabula with responsibility for portfolio management and product design. Prior to Tabula, Jason was a Senior Portfolio Manager at Goldman Sachs Asset Management, where he managed fixed income portfolios for institutional clients. Previously, he was Head of Portfolio Management for the absolute return funds at Barclays Capital, receiving both a Citywire ‘A’ rating and Lipper leader award for performance. Prior to that, he managed both fixed income and absolute return portfolios at some of the largest asset managers in the industry, including BlackRock, J.P. Morgan Asset Management, Towers Perrin and IBM. Jason holds a BA in Banking and Finance from the London Guildhall University and a post-graduate diploma in Artificial Intelligence from the University of Westminster. Jason Smith is a member of Tabula ESG Committee.

Francesco Romano, Head of Risk and Quant

Francesco Romano is Head of Risk and Quant at Tabula. Previously, Francesco was a quantitative analyst at GFG S.A.M. working on quantitative strategies and UCITS fund risk reporting. Prior to this Francesco spent three years at UniCredit Group working on Counterparty Credit and Market Risk. Francesco holds an MSc in Mathematics from the University of Milan.