The Sputnik adrift

The Sputnik adrift

Last year my friend Ashley Owen demonstrated that there is no observable relationship over any one-year period between economic growth rates and share market performance.  So macro economics doesn’t form part of our investment process.  Microeconomics however is a different thing altogether and the trends and structural changes in an industry or sector of an economy are vitally important to the companies therein.

One way however that macroeconomics can impact your investment is through the financial market volatility.

According to Mohamed A. El-Erian – the former CEO/co-CIO of PIMCO, the Chief Economic Advisor at Allianz and member of its International Executive Committee as well as the Chair of US President Obama’s Global Development Council – heightened volatility may have just taken a step closer to your portfolio.

A few days ago El-Erian, wrote for Bloomberg about the precipice on which the world stands, after the G20 countries failed to unite behind a call to action at their meeting in Shanghai, China.

In his words, the assembled ministers of finance and central bank governors “seemed a lot more worried about the prospects for global economic growth” adding they “recognized that the policy mix being pursued in many of their countries remains highly imbalanced, perpetuating an excessive reliance on central bank experimentation.”

But despite mounting evidence of risks to growth (QE isn’t working) and financial stability (asset quality is deteriorating, including and particularly in, China), the G20 essentially concluded their meeting with a rehashed “version of previous policy statements”.

According El-Erian, “This is a far cry from the individual and collective actions that G-20 members must take if the global economy is to avoid even more disappointing growth and greater financial instability.”

“Judging from publicly available information, there is little coming out of the G-20 to suggest major improvements in the policy mix of the most systemically important countries. Instead, rather than using “all policy tools — monetary, fiscal and structural,” as stated in the G-20 communique, these countries will continue to be constrained by political realities and will remain inclined to continue to rely excessively on increasingly exhausted central bank policies, whose effectiveness is being undermined by greater threats of collateral damage and unintended consequences.”

In the absence of significant co-ordinated policy implementation, global economic growth is expected to, at best, muddle along, and according to El-Erian “financial volatility will increase”.

Finally El-Erian, observes “Should financial leaders fail to seize that opportunity for a Sputnik moment, the world would take another step toward the point when low growth could give way to recession, bouts of financial volatility could evolve into more damaging financial instability, and worsening inequality could fuel greater political dysfunction that undermines future generations along with ours.”

At Montgomery we offer a range of funds that seek not only to grow capital but to preserve it.  In our domestic and global funds, we are able to maintain relatively large cash balances, while in the Montaka Global Fund we also hold a portfolio of short positions that seek to profit from declining prices, thereby seeking to provide some protection from falling markets and heightened volatility.

Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.