As central banks have embarked on a disjointed unwinding of their balance sheets, it is easy to see that the day of reckoning is upon us. But what does it mean for investors?

In bonds, equities, and currencies, we have seen large price discrepancies from fundamental values. But we are beginning to see moves toward fundamental value on several fronts.

This is due in part to a prominent component of the current market environment—rising interest rates. Central banks raise rates to dampen potential market bubbles and to arm themselves with the ability to lower rates in the future if necessary.

When markets see central banks are no longer willing or able to protect prices, risk premia of long-term debt and other risky assets will likely jump, suddenly suppressing prices. And as we have seen previously, central banks will rush in to lower short-term interest rates if markets start to shake.

In bonds, equity, and currency, we see large price discrepancies from values, and we are beginning to see moves toward fundamental value on several fronts.

Bonds

This will punctuate the bond market with volatility that has been absent for many years. We are positioning the portfolio to enable liquidity provision in panic situations, particularly in corporate bonds that are vulnerable to liquidity shocks and packaged in purportedly liquid exchange-traded portfolios (ETPs).

We must be prepared to exploit these opportunities as long as we avoid positioning ourselves on the wrong side of fundamental value.

Equities

Equities offer significant opportunities in long-term value versus price, but we are also keenly aware of the necessity to navigate the waves that we foresee.

We want to be more cautious than average when exploiting these opportunities and be ready to step out of positions if a crisis is imminent.

It is to our benefit that some prices are below fundamental values and provide opportunities to be long while others are above, enabling us to be short. We will position long and short across assets as we build larger long exposure in attractive equity markets.

Emerging markets generally have a more solid reserve situation now, but there is a widespread worry that their vulnerability can spark pessimism for seemingly no substantial reason. Many emerging markets have increased significantly in value after adopting institutions supportive of wealth creation.

We want to step into these markets during emerging market panic-herding while avoiding or even shorting those that remain institutional laggards.

Finally, as markets normalize, value will likely outperform , reversing in some measure value’s long period of underperformance. We should exploit this reversion by positioning ourselves in value-heavy sectors such as financial, utilities, and energy. We may opportunistically consider value- and growth-style indices to dynamically manage our value style tilt.

Currency has been and will continue to be an important source of return.

Currency

Currency, which is uncorrelated with the broad portfolio over time, has been and will continue to be an important source of return. In this environment, its lack of correlation with markets allows it to be an engine of return that is outside the realm of our market concerns.

We should therefore expect to take bigger risk in this space than in markets until we are able to capture market opportunities.

Navigating the Crisis

When the day of reckoning arrives, hedge funds, algorithmic traders, and other high-frequency investors will be stepping in to provide liquidity. We will need to navigate those forces, dynamically shifting across opportunities as needed.

We will only take risks when and where we think they’re compensated for, and only in proportion to the compensation we think they’ll generate.

Where Opportunities May Emerge

Navigating a Troop of Gorillas Blog Series

Part 1: Navigating a Troop of Gorillas
Part 2: New Movie, Same Plot: 4 Waves of Monetary Policies
Part 3: The Bigger the Easing, the Bigger the Fall
Part 4: Why This Disruption is Different—Rules-Based Strategies
Part 5: Why This Disruption Is Different—the Volcker Rule
Part 6: Why This Disruption Is Different—Circuit Breakers
Part 7: Fundamentals Re-emerging

Active Never Rests

Brian Singer, CFA, partner, is a portfolio manager on and head of William Blair’s Dynamic Allocation Strategies team.

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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 and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. 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 © 2019 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 and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. 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 © 2019 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
Cookie Policy | Social Media Disclaimer | Privacy & Security | FINRA’s BrokerCheck

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