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Everything in our universe eventually collides. In 2017, Danish astronomers detected an extraordinary event in a remote galaxy. Two neutron stars, each with a weight greater than the sun but compressed into the size of a city, had been rotating around each other uneventfully for billions of years. Then suddenly, the stars – moving at 100 million meters per second – entered into a fatal spiral and crashed into one another in a spectacular explosion.
This so-called “macronova” event created a black hole and a new mystery. The collision, as would be anticipated, pumped out elements and energetically scattered them across space. But the resulting blast completely defied expectations, creating a flawlessly spherical fireball of vivid blue and red colours. With such complex physics, why such a perfectly symmetrical shape? Even for the bright minds of astronomers this is baffling stuff and has become the most widely studied cosmic event in history.
Back on planet earth, investors have been grappling with similarly mind-bending issues. Chaos, crisis, and financial shocks defined the high-impact year that was 2023. Consider all the raw material thrown at investors – recession fears, geopolitical frictions, banking implosions in Silicon Valley, and of course, rapidly rising rates. No surprise that all this drained investor confidence and a rush into cash has been the key investment trend of 2023. Higher confusion translates into higher cash weightings. As we write, worldwide investors were on track to pour a record $1.5 trillion into money market funds by the end of 2023. Risk aversion is now at levels comparable with the depths of 2008’s global financial crisis.
With these conditions, money managers are invited to turn everything over in their heads like a Montaigne gem and come up with a coherent investment playbook. Markets are easy right?
Yet investors should not lose sight that recent volatility simply extends a narrative that began in 2020. In essence, the pandemic was our macronova – a moment of economic reset and powerful policy breakthroughs. Most notably, fiscal stimulus arrived fast and furiously. And the largesse is still with us. A robust economy usually reduces government spending. Not this time. Astonishingly, America’s federal deficit is projected to double from 2022 to 2023, a surge only surpassed by major crises.
Other oddities are also still with us. Consider the shape of this economic cycle. None of what has unfolded over the last few years has taken the form of a traditional, well-defined business cycle. Economic shutdowns and re-openings were fully coordinated by government, rather than market forces. And because different nations opened at different times and with different velocity, the world economy remains highly de-synchronized. Of the three global locomotives, only the U.S. has been pulling its weight; both Europe and China have been stagnating. Determining “where we are” in the cyclical roadmap has been challenging.
This is new territory. Ever since globalization gathered pace in the early 2000s, world trade and economic cycles had become far more correlated, not less. In many ways, global economic conditions are now similar to those experienced after World War II: lingering distortions with deep labour shortages, chronic government spending, and a fragmenting world.
Economic crises are also crucibles for new thinking. The Great Depression led to Keynesian macroeconomic policies. The second world war cemented support for much greater public sector involvement in economic decision making. The inflationary 1970s and the oil shocks propelled free-market ideas to power. And now, the pandemic has again moved government intervention back into the driver’s seat – the activist state is back in a big way.
This shift should not be underestimated. In fact, stand in wonder at the symmetry of it all. The previous neoliberal era of the last 40 years gave us deregulation, free trade, internationalized supply chains, smaller government, independent central banks, and the death of trade unions. The 2020s are set for a full reversal.
Meanwhile, a steady withdrawal from the previous gravitational pull of globalization can be witnessed, with countries continuing to slip out of Washington’s orbit. In 1975, the G7 accounted for more than half of global GDP. That figure is now below 30%. Investors do not have to venture into the dark corners of the web to see what is hiding in plain sight: the BRICs nations, with some 42% of the world’s population, are swiftly gaining global influence.
Our world is undergoing deep structural changes. But much of this can lead to higher returns for intrepid global investors. Exiting from the low interest rate decade of the 2010s has been an enormously positive development. Investors no longer need to suffer low rates or even take big risks to generate yield. Whereas the last decade was a great time to be a borrower, it is now a wonderful time to be a lender. Economic growth in international markets, many of which have been left for dead over the last decade, is finally showing life. At the same time, a fracturing world has amplified the power of international diversification: lower correlations, that coveted metric of portfolio construction, are now available.
Overall, the return prospects across many investment classes are much higher than they have been for decades. Of all the big ideas floating around – recession, deglobalization, fragmentation – this seems to have been lost in the conversation. And, while many have spent the last year braced for recession, our investment team has a thesis that may stretch minds: We are entering a new risk-taking cycle based on an entirely different set of macroeconomic conditions and entirely different investment leadership.
How best to proceed in this new era? When uncertainty is this high, we gain more from assessing markets at a more distant horizon. The danger is that it is easy to mistake noise for signal in volatile markets. This is especially true in the age of social media, where attentions can easily be directed to the trivial, while more weighty subjects are often reduced to tiny viral moments. That means investors need to, more than ever, lean into longer-running macro trends and identify the most important patterns in the force of change.
We aim to do just that in our Super Trends 2024 report. Over the coming weeks, Forstrong’s investment team, a collective with several centuries of combined global experience, will share our best ideas about the world’s most important Super Trends – those enduring themes that will have the largest impact on capital markets. Our hope is that this report will help investors make sense of the unfolding macro landscape and unravel some of the market’s mysteries.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. This article first appeared in Forstrong’s Super Trends 2024. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on X at @TylerMordy and @ForstrongGlobal.
Disclaimers
Content © 2024 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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