There are two broad themes impacting investors globally at present; hysteresis and uncertainty.
Arguably there is a third background theme of financial repression, but if we focus on the two main themes of hysteresis and uncertainty, and deal with the latter first.
In terms of uncertainty, there is an entrenched mind-set among investors globally that no matter how good things may be at any point in time that there is an omnipresent threat of significant loss… pain… the abyss!
It means a state of ongoing background worry. Think the natural levels of radiation that Geiger Counters pick up in the environment but from a market uncertainty perspective, and this inherent rolling unease is what investors are living with day-in, day-out.
Naturally this is an unhealthy situation for all concerned!
Just out of interest, the average annual human exposure to ionizing radiation in millisieverts (mSv) per year is 2.4.
If we equate this into an equivalent base level of fear among investors, then the spikes that happen beyond this are analogous to regular x-rays (but without any protective lead cover) and from time to time akin to standing next to a nuclear plant that’s in the early stages of a core meltdown.
Radiation aside though, if we now deal with the notion of hysteresis; an economic notion for when things don’t return to normal after a shock.
Think de-industrialisation, think de-forestation, or at a more industry level… the ‘so-called’ good old days of excess in asset management… it’s gone. Things are not going to revert.
For the mere mortals among us, think any injury you suffered that never fully repairs, think getting back to a level of fitness you’ve had in the past. Point made.
Investors, advisers and institutions still have to make decisions but now need to adjust their expectations if they haven’t already.
What was once possible, is no more. Double digit returns net of inflation and with moderate risk levels are a relic, and if not, at least a rarity!
Low global growth, hamstrung monetary policies, indebted nations, slashed corporate dividends and geopolitical challenges at the fore provide significant hurdles to good outcomes.
These require a different investor mind-set and one in which the notion of a 3% to 4% return is deemed a remarkable achievement for one’s investments.
The flood of money into near-zero yield government bonds suggests people will be happy to float as we pass through and beyond the eye of the storm that has been building and could soon deposit heavy loads of rain, and bring waves of volatility crashing down on all concerned…
If the psychology shifts to outright protection then what does this mean for low-cost passive plays and could it ironically be a saving grace for active managers? Absolute performance net of fees will most likely be very uninspiring in a highly charged and volatile market but relative to market index (which includes the passives) should be better.
The next six to 12 months will be a period where managers either sink or swim. And for those that sink there will be no return to the surface as competition (add in fee compression and the ongoing technology revolution) is too fierce to bounce back.