Recently, most markets and investments have seemed extremely correlated with each other.
During the financial crisis, many investors who thought they were diversified or ‘market neutral’ watched as all of their assets fell in unison.
The folly of using historical correlations between assets to forecast their future correlation was laid bare and many in the risk management community ate their share of humble pie.
Yet during the recovery and rally since the financial crisis, it’s also felt as if most asset classes simply rise or fall as a group when either the global economic picture brightens or darkens.
As a result, macro strategy is back in vogue, and specific investment selection seems dead. You listen to Nouriel Roubini for direction, and forget about the guy telling you about some amazing company in the middle of Idaho, because if Roubini is right then whatever stock the other guy is talking about will fall regardless of how good the company is. So goes the thinking, and media commentators’ use of the nebulous term ‘risk-on’ or ‘risk-off’ to describe market action epitomizes the current market psychology. Nothing matters except the macro.
Indeed, the prominence of macro strategy has made sense thus far given that the world just experienced a major inflection point for the global economy. When most assets were simply going up pre-financial crisis, the macro guys seemed useless and it was all about picking the winners. Now macro is in high demand because so much hinges on whether or not the world slips into a new crisis, and people like Mr. Roubini are an attention magnet. In turn, professional investment research has also experienced a renewed interest in the macro and a diminished interest in analysts who focus on niches, such as equity analysts.
But what if our major economic inflection point has already passed, and we’ve already settled into a new long-term trend? While we’re all still looking for the next crisis to erupt or the next V-shaped recovery to prove bears foolish, it could be that we’ll get neither.
In fact, the world economy increasingly appears to be settling into a growth trend whereby emerging markets keep moving forward at a decent clip while developed markets manage weak growth with protracted high unemployment. The world doesn’t end, but nor are we on the cusp of a 1990’s America. If such a steady scenario is hard to believe, then it’s probably a sign of how shell-shocked we’ve all become since the crisis.
Yet should this trend prove itself, then prepare to see the macro strategists loose their relevance. Investment selection will make its return and macro guys will take a backseat… which means it’s probably time to take another look at that amazing company in Idaho.
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