CEO’s Weekly Outlook – on alert for a sea change

The traders’ task is essentially to reduce. To take all of the moving parts, the three-dimensional, real-world considerations, and reduce them all to a single answer. Is this stock or ETF going up or down?

Ultimately, it’s the same for investors. We understand the imperfect view of the future we have standing in the present, and expect that not all of our choices will be successful. But the aim is to invest in assets that increase in value. Ideally, every one of our investments rises.

How do successful investors distil all of the important information about an investment choice? The answer is as individual as the investors concerned.

Some take a strict and narrow lens. Value investing, as espoused by legends such as Benjamin Graham and Warren Buffet, is an example. Although there is much variation among individual value investors, at its core is a focus on higher quality businesses at cheaper prices, regardless of broad market conditions.

Thematic investing may take an opposing approach. A recent example is the investment push into Artificial Intelligence. Many investors looking to profit from the emerging theme bought a collection of AI exposed stocks, looking to profit from the broader idea rather than any individual company’s achievements.

One of the great opportunities for a market strategist is regularly meeting and hearing from investors and traders at all levels of their market journey. Ultimately market prices are the product of crowd behaviour, so understanding the crowds’ thinking is a huge advantage in making trading decisions. In talking with investors at seminars and trade shows there is a persistent question; “what is the best way to invest?”.

Investors rarely like the answer. That’s because it’s not a straightforward “magic bullet” that will solve all their investment problems. In my opinion, the answer is “to deploy the best investing and trading approach that suits your personal circumstances and the current market conditions”.

The two considerations are important. “Your personal circumstances” includes your investment goals, your timeframe, your risk appetite and your existing investments, among other factors. These factors are entirely up to individuals, and are the reason why the answer to the question is different for everyone.

However “current market conditions” is a topic we can all debate. And it’s the potential for a sea change that is capturing attention.

After the GFC in 2008, and the Covid lockdowns of 2020/21, the response from central banks dominated markets. The flood of money that was intended to support economic conditions also lifted asset prices across the board. These market conditions lent themselves to momentum-based trading and investing, and the monetary policy support meant that dip-buying strategies delivered strong returns.

It’s clear in the US that the government does not want the era of easy monetary conditions to end. The issue is that rising inflation makes “running the economy hot” not only a structural risk, but that rising consumer prices could wipe out any political benefits of lower interest rates and stronger employment.

Inflation is the key. The Bank of Japan and the Reserve Bank of Australia have already moved to a tightening bias. In the previous week US producer prices moved higher, rather than fall as predicted, a leading indicator of inflationary pressures. If inflation is heading higher globally, the era of easy money may be over.

The simultaneous implosions in precious metals and cryptocurrencies points to investor concerns that this is indeed the case – inflation will force banks to withdraw the extraordinary liquidity that has boosted asset prices across the board. And that all assets – shares, property, bonds, metals, cryptocurrencies – will be re-priced to reflect this sea change in market conditions.