Updated: Apr 14
“There are decades where nothing happens, and there are weeks when decades happen” - Lenin
January 1990- with the Soviet Union beginning to unravel, Mcdonald's, that classic symbol of western economic success, opened its first Russian outlet cheered on by Gorbachev and Perestroika. The Washington Post carried the headline “Moscow plays Ketch-up”, and 30,000 people were served in a single day. Wow. Capitalism took root and grew over the next few decades to the point where Russia was a decent place to do business. Feb 24th, 2022- and the invasion of Ukraine. A few weeks later, Mcdonald's is closed and Capitalism is at war with Russia. Is this what Lenin was getting at?
“ I didn’t expect that in my lifetime” is the common refrain about the war in Europe where the certainty of peace was shattered. Markets detest uncertainty. Worrying about investment returns is the most normal of reactions in abnormal times. We set our stall out to deal with this as follows:
What do our Herd of multi-asset managers worry about most?
Where do The Herd see their portfolio performance at the end of the year?
Where is the merit in “stay calm, stay invested”?
Short-term volatility and inflation- like going to the dentist- sit still and take the medicine.
1. What do our Herd of multi-asset managers worry about most?
Behind the headline grab of the newsreels, the Russian Equity market was only around 3% of the global market with Ukraine even more unnoticeable. The impact on our clients’ portfolios will revolve more around the indirect consequences of the war. The sudden scramble to meet energy needs in different countries and the impact on an already nervous inflationary scene that grew its roots during the COVID struggle are the most serious consequences. Then there is the concern that Russia/Ukraine produces a substantial amount of the world’s wheat.
This is the backdrop for our Asset Manager comments. For Phil Smeaton at VAM/Sanlam, his biggest concerns are:
Consumer spending diminishing because of the cost of living crisis
Inflation remains stubbornly high forcing more interest rate hikes than people expect
These same sentiments are buried in the fears of Lorenzo La Posta at Momentum Asset Managers, sounding like a “same horse, different jockey” his three main fears are:
1. High inflation
2. Rising interest rates
3. Slowing economic growth.
Speaking at a Quilter Cheviot event, Daniel Jolliffe listed his fears
1. Persistent inflation leading to over-zealous policy tightening.
2. New COVID virus strains.
3. Escalation of the Russian war in Ukraine.
The obvious conclusion from the above is that whilst war dominates the column inches- it is the inflationary environment and its concomitant interest rate hikes which worry the moneymen more.
2. Where do The Herd see their portfolio performance at the end of the year?
This question always produces forms of the “we haven’t got a crystal ball” response. Nevertheless, one common theme from multi-asset managers, mainly driven by current fears, is that their approach WILL be more successful than the passive fund philosophy. Passive investment (the fund management art of doing nothing) may be cheaper than paying for an Active Fund Manager, but will it provide better net performance results over the next couple of years?
Obviously not if we listen to La Posta at Momentum: “We expect bouts of volatility, as markets react to the news flow and recalibrate probabilities of different outcomes around central bank policies, economic dynamics and consumer spending “, all of that before specific downside COVID and War scenarios. “Our portfolios are positioned to weather a variety of scenarios. Risk management always plays a significant role in our portfolio construction. Our multi-asset funds are diversified across many asset classes and strategies, relying on different return drivers, which helps reduce downside risk. We’re not in the business of making 9-months predictions, but we believe that, given the risks out there, multi-asset funds should provide a smoother journey than equities and that long-term investors should find this an attractive entry point given the currently low(er) valuation of many asset classes. “
It’s a sentiment agreed by Phil Smeaton at VAM/Sanlam who, playing with the same philosophy as La Posta, believes his USD portfolios will be driven “modestly higher” by earnings growth and dividends, more boldly predicting that his multi-asset USD Risk portfolio gains “will be bigger than the S&P 500” by the close of the year.
3. Where is the merit in “stay calm, stay invested”?
What we will see during these bouts of volatility is many inexperienced investors exiting the market. We know this from experience. We fight it with the standard line that trying to time the market is not as easy as simply spending time in the market.
The following two slides help us deal with the point:
A. Missing the top trading days versus staying invested.
The slide shows that however many days you take out of time in the market is likely to hurt. Forget trying to time it, as Warren Buffet said his three biggest mistakes were "Selling coca-cola, selling coca-cola, and selling coca-cola".
B. Lessons from history.
“Lessons from history” is a slide provided by our friends at Momentum (source- Deutsche Bank). The Israel/Arab War scenario looks fairly horrific and reflects the worst fears of war escalation and indirect consequences. However, all back to good again within an economic cycle. That really is the point of “stay calm, and stay invested”. If you don’t have the 5 to 7 years of an economic cycle- then cash management would grow in importance for any monies needed in the immediate term. However, that should be the mantra whatever the market scenario. For whatever you need for the next five years- stay in cash!!!
4. Short-term volatility and inflation- like going to the dentist- sit still and take the medicine.
Having persuaded readers to stay calm, stay invested- there is more medicine to take. Current facts:
At the time of writing US inflation is approaching 8%, UK inflation at around 6%, and others are on the climb.
At the time of writing (unusually) markets rallied on a recent rate hike by the fed because it wasn’t as bad as expected. However, the expectation of the likes of QC is that the “worst-case” over the next year or so is that interest rates will rise to around 2% by way of around 5 to 6 hikes.
If you get 2% on your USD cash savings you will be doing exceptionally well.
At the time of writing, few asset managers will get their crystal ball out to forecast portfolio performance. However, we take Phil Smeaton’s “modest expectations” to be close to the upside- that is to say – with good positive wind- 5%.
Horrible Medicine ( USD example)…………….
Inflation at 8%.
Cash at 2%.
Returns at say 5%.
Result = a negative real return (real = your actual portfolio performance less inflation). Negative real returns look almost certain.
HOW DOES THE MEDICINE WORK?…………
Investing for a real loss is a likely 2022 outcome.
In point 3 above we make the point that it doesn’t make sense to have an investment horizon of less than (say) 5 years. Even in a bull market volatility is normal. Therefore “cash management” is the go-to strategy for all short-term cash needs.
The reward for taking the medicine of absorbing a “real return” loss in 2022 is earned after an economic cycle.
Markets will revert to mean over time…. Stay calm, stay invested….. time in the market is better than timing the market…. for all monies outside of the next five-year needs. In the meantime, if you have savings….. INVEST….. when there is blood in the streets…...
For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC, please contact us at
+971 56 2228 535