How institutional investors can see through the noise
2019 Risk Management Conference Coverage
BY Yaelle Gang | October 17, 2019
In a world with volatility and uncertainty, four key transitions can explain the headlines: China, technology, energy and demographics, said Vikram Mansharamani, who is a lecturer at Harvard University and author of Boombustology: Spotting Financial Bubbles Before They Burst.
China is growing and trying to transition to a consumption-led economy, but the transition isn’t complete and it’s overcapacity in many sectors, so the country is selling its goods at low cost, he noted when speaking at the Canadian Investment Review‘s 2019 Risk Management Conference.
At the same time, technology is accelerating and creating more outputs for given inputs, which is also creating more supply.
As well, the energy economy is transitioning and the Middle East is becoming a much less important player, as alternative energy supplies are popping up globally, and with North America becoming a more prominent energy producer, he added.
And, there’s a demographic transition under way in which the world’s largest economies are aging rapidly. As people age and move to a fixed income, that’s a demand shock.
“Now, when you put those four big tectonic trends together, an aggregate economic analysis, what do you think they [add up to]? More supply, more supply, more supply, less demand equals deflationary pressure.”
While there are pockets of mismatch where this trend doesn’t exist — it does on aggregate, and where there’s supply and demand mismatch, countries use their currencies to compete for the limited global demand, Mansharamani said. “Currency wars are a natural outgrowth of this idea that too much supply and not enough demand exist in the world.”
When there is only so much demand, there is also a winner-takes-all outcome, he noted, which contributes to inequality, and subsequently, nationalism and protectionism.
Despite all the noise, long-term investors like pension funds shouldn’t be affected by the news and just need to navigate to where the puck is going in the future, Mansharamani said. And this can be done using multiple lenses to look at the world and by trying to find patterns, he noted.
“This is a matter of perspective: opportunity or threat. Everything can be characterized as one of those two. And so, it’s your choice how you choose to do it. You can sit there and be threat-oriented, and, by the way, given the volatility in markets and economic outlook, nobody would blame you. Be threat-positioned. Be defensively postured.
“Alternatively, you can try to look through this noise. And I see there’s a pretty interesting world there. Pay attention to the crosscurrents that come with it. But I think there’s a big opportunity there, and I would encourage you to take the opportunity mindset.”