The last several months have been a challenging environment for most fundamental investors, as prices have been moving away from fundamental values. It is the type of environment where we try to do our best to preserve capital. At the same time, we are seeing the opportunity set widening.

“People are trying to be smart. All I’m trying to do is not to be idiotic, but it’s harder than most people think.”
– Charles Munger, Warren Buffett’s right-hand person

While the opportunity to take more risk has increased significantly, it is not a game we are willing to play. Central banks are encouraging the taking of risk–at some point that game of musical chairs will end, and we don’t want to be the one caught without the chair. But there are opportunities on the market side – and less dramatically so within currencies – that we will ultimately seek to take advantage of in our portfolios.

Central banks are encouraging the taking of risk–at some point that game of musical chairs will end, and we don’t want to be the one caught without the chair.

So, what are we watching for in order to ascertain when and where to act on these opportunities? We’re watching China, we’re watching oil, we’re watching the Fed, and we’re watching populism.

China: About four years ago, we talked about how the market was overly negative on China. During that time, there’s been a lot of borrowing to stimulate infrastructure growth, and while that was not necessarily a problem back then, it is creating problems now. The problems are large but not cataclysmic. It is something that we will continue to monitor as this borrowing has not yet flushed its way through the financial market system.

Energy: There are a number of factors related to energy. There’s been a surge in supply on tech innovation, the Middle East has an incentive to maintain low oil prices, Iran’s coming online in about a year with another supply source in the region, warm weather has created a demand shortfall, and inadequate storage facilities are creating some technical problems. Bottom line, you’ve got a price disequilibrium in oil right now. It might last one day. It might last a few months. We don’t know, and it’s probably hard to say if anybody actually knows. But we do believe the equilibrium for oil prices is around $45 a barrel.

Fed: When it comes to the Fed, who knows? Never in the history of central banking has anything been done like what the Fed is trying to do now. There is no roadmap. No major central bank since 2008 has successfully raised interest rates. The Fed is trying to do it now. Maybe it will be successful and maybe it won’t. Again, that’s something that we’re monitoring very closely.

Populism: Lastly, there’s populism. The population in many of the developed countries, Europe, U.S., and maybe the Middle East, are losing faith and trust in their leadership. That creates a difficult environment for capital markets when we have to rely on fiscal policymakers and central banks around the world ostensibly maintaining economic growth and stability. So right now, uncertainty reigns.

Again, what are we looking for? While recent market movements begin to emulate the type of capitulation that we were looking for, it is not necessarily complete. We are looking for the market to be screaming for liquidity. This has been a central bank-driven liquidity rally, with central banks encouraging risk taking. Since it’s a liquidity-driven market, we don’t think it will be over until there are fears about insufficient liquidity across the market. While there are definitely liquidity issues in high yield and energy, concerns have not yet reached the level of true capitulation.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
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