Investment Committee – July 2022
Federal Reserve is on its way to tighten harder for longer than at any time in the modern era. Valuations become more attractive but volatility persists
KM Cube’s Investment Committee met to discuss recent developments in capital markets and determine a guide for the coming months. After a turbulent June, members took time to zoom-out a bit and shape a bigger picture. The Macro101 reminder of the month was that the true value of any asset depends on the economy at that specific location and at that instant in time. Any change in available resources, or how those resources are being used, will determine the value of all assets. Through fixing prices via fiscal, monetary, and regulatory policy, in the past 20-30 years governments are denying price discovery, and in the process they destroy working capital. This means that, eventually, governments will lose the capital needed to maintain control. This is a gradual, long-term process – way longer than our investment horizon. But as the reality of higher interest rates weighs onto the economy, all assets reprice to reflect this new information. The result is we experience persistently higher market volatility.
The year of inflationary bust
The Committee discussed how the Federal Reserve is on its way to tighten harder for longer than at any time in the modern era. For markets, we assess this means that 2022 will remain in history as the year of the inflationary bust, the first such incident in 40 years. This already proves exceptionally damaging for the so-called 60/40 stock/bond portfolios and their younger brothers that look to diversify through a theoretical negative correlation between stocks and bonds. Members debated how risk assets are getting hit hard and how in the meantime clients may find harbor in value stocks and financials.
The bond market
Τhe Committee considered that once disappointment becomes complete, only government bonds will serve as a diversify. It also talked through that whilst the bond market correction has already exposed NASDAQ index to over -30% correction, stocks appear to be facing more of a great rotation out of growth (technology) and into value (cyclicals, commodities, etc.). If history is any guide, and in spite of some impressive moves already, this rotation has barely just begun. Controversial as this may seem, we are trying hard to remain agnostic against any macroeconomic theory, including ours.
Competitive portfolio
The Committee unveiled a collective work of the firm’s portfolio managers, that attempts to identify relatively cheaper equity names that may outperform in the future. By systematically exploiting such factors that have structural reasons to exist and persist, the Committee believes there might be some competitive edge to harvest for our portfolio clientele. A comprehensive methodology and there results are presented can be found in this article.