Investment strategies for volatile markets

GLOBAL INVESTOR 3.07 Lead — 15
early 2003) against these historic cycles, it appears that the first
three phases have been almost completed, implying that the fourth
phase lies just ahead. If the historical pattern is repeated, this
would suggest that stock markets can continue their rising trend
for at least another three to four years, but this trend would be
more volatile than it has been recently. In particular further significant
corrections could lie ahead over the next 12 months.
Such corrections could be in reaction to ongoing credit problems,
at a time when central banks face the dilemma of on the one
hand wanting to support markets and the economy, but on the
other, not wanting to encourage future lax behavior by relaxing
policy too readily at times of stress.
Looking much further out, many of the conditions seem to be in
place for a new secular bull market in equities that could potentially
last decades. As in the late 19th century, there is a demographic
expansion and migration of peoples toward productive capital, but
on an even larger scale. There is a cluster of enabling innovations
(digital and nanotechnologies, and new flexible working patterns)
potentially comparable to electricity in the late 19 th century, automobiles
in the mid-20 th century, and lean production and the
early digital era in the late 20 th century. And there is the stimulus
as more and more countries join the world trading system. But the
sheer pace of change suggests that the path into such a bull market,
if it happens, is likely to be turbulent. As major new companies
in China, India, Russia and elsewhere jostle to be global champions,
following Japan’s Toyota and Sony in the 1960s and 1970s, Western
companies will need to reinvent themselves ever faster. And the
sometimes unfulfilled aspirations of surging and youthful populations
point to ongoing geopolitical upheaval, as does the evolution
from hegemony to a multipolar world, and conflict related to
climate change.
“… stock
markets can
continue on
a healthy
trend for many
years …”
Opportunities, but volatility likely to be higher
As for monetary policy, central banks may avoid their earlier crude
overreaction to previous errors, but have the subtler challenge of
massive shifts in relative prices. Manufacturers and traded services
face secular deflation, while the opposite applies for resources –
energy, metals, water, soft commodities and land. In this environment,
disentangling structural from cyclical when setting monetary
policy is especially difficult, and there are likely to be mistakes.
So inflation should stay broadly under control, but will be variable.
This implies the great bond bull market of the 1980s and 1990s is
probably over, but although yields may need to edge up for a year
or so for cyclical reasons, a major bear market seems unlikely on a
longer view.
Any outlook for the markets can be thrown off course by a
myriad of factors. But if the vision set out here proves broadly correct,
stockmarkets can continue on a healthy trend for many
years, albeit with volatility likely to be higher than we have recently
experienced. Investors who are prepared to weather such
fluctuations can take a more or less direct exposure to the equity
markets. Others may prefer investment strategies that, while
maintaining broad exposure to the long-term uptrend that we envisage,
also devote a portion of that potential return to dampening
down volatility.
Special thanks to Marcel Thieliant, Alison Weingarden and Reto Meneghetti for
providing the research data used in this article.