Conventional wisdom—which we refer to as the view of the marginal investor—is uniformly positive regarding global growth. This positivity concerning economic activity across all regions is not something the market has experienced in quite some time.
We believe this positivity may have started to run its course, and we continue to monitor conventional wisdom as well as macro themes and geopolitical developments as part of the second stage in our investment process. As we have discussed in the past, the Why stage of our investment process is centered around navigating the path that market and currency prices take on their way to fundamental value.
Let’s take a closer look at conventional wisdom. The chart below is our broad summary of how we see conventional wisdom playing out today.
Using the above chart, the top right quadrant represents the areas where the market views are most positive, supported by growing economic activity and increasing monetary policy accommodation. Contrastingly, the bottom left quadrant represents the areas where market views are most negative.
By dividing the chart diagonally, we can observe the eurozone, Switzerland, and Japan are all high in terms of economic activity and increasing monetary policy accommodation, while China is the least supported from a conventional wisdom perspective. This analysis shows that risk aversion is relatively low across the globe. As a result, the market’s broadly positive economic views across the world are underpinning positive views on the equity markets.
Unsurprisingly, market volatility has been extremely low for an extended period of time. Consequently, we have increased the portfolio’s systematic (beta) and unsystematic market risk from later in 2016 through the middle of 2017—our overall risk level is currently at a level we would consider to be slightly below our long-term average expectation.
We believe this risk profile is appropriate given valuation opportunities, which provide a wide opportunity set, including both unattractive and attractive markets and currencies, as well as our conventional wisdom analysis and today’s geopolitical risks.
In response, we have started slowly increasing our currency risk in the portfolio in the middle of 2017. Given the macro diversification benefits of our active currency approach, an even higher currency risk posture is possible going forward.