The Last Domino to Fall
By Marc El-Lazidi, Chief Investment Officer at Jesmond Mizzi Financial Advisors
With runaway inflation and the Ukraine war wreaking havoc on the global economy, the US market could well be the last to offer investors any real opportunities, argues Jesmond Mizzi Financial Advisors’ Chief Investment Officer Marc El-Lazidi.
Earlier this year you hosted a webinar entitled “Fishing for performance in troubled waters”. Since then, war has broken out in Europe and central banks around the world are scrambling to control spiralling inflation which is threatening a global recession. Would you say those waters are more troubled today?
Yes, definitely. Inflation has been creeping up for quite a while now and, along with supply chain challenges, it was already a consideration at the start of the year. But the war now has taken things to a whole new level.
In that webinar you pointed out that a ‘buy the dips’ strategy had been the most effective during 2020 and 2021 but you questioned whether this would still be the case in 2022. Is it?
The declines we’ve seen across the markets have resulted in some losses for investors, but they’ve also created opportunities. We’ve seen a lot of money flow through the system over the last couple of years, and this created an environment where a company’s balance sheet was less predictive of the true value of its shares. It’s a climate that makes it reasonable to assume that whatever goes down will at some point come back up.
When the money starts to dry up it starts to become a lot clearer which companies are over-valued. Our standard practice is always to performing a deep dive into the balance sheet of the companies we are investing in, but it becomes so much more important at these moments.
When everything is dipping you need to be more selective about which dips you buy, but if you know what you’re doing, you could see significant returns. This is especially true of the US market.
How would you sum up your investment strategy?
At the end of the day the job of a portfolio manager is to find the right balance in allocation between defensive bonds and other bonds that allow us to offer decent yields to our clients.
The emphasis, however, is on long-term investments and not chasing short-term profits. We take a dynamic and pragmatic approach in everything we do while also emphasising the importance of risk management. We always make sure that any decision to invest is backed by a stable balance sheet and healthy cash flow.
This has been somewhat difficult over the last couple of years because you had a situation where stimulus packages and government COVID-19 support schemes added a lot of noise to the data, making it harder to find the signal.
What are the advantages of investing in the US market over others?
It mostly just boils down to the US dollar being the dominant global currency and one which is a long way from being challenged.
The US offers a much more generous corporate environment when compared to Europe or other markets, with companies having significantly fewer obligations towards their employees.
Perhaps what makes the US stand out from the rest is the pervasive culture of entrepreneurship and an economic policy aimed at maximising growth and employment more than anything else.
There is also a reality that you often get better returns on US dollar-denominated assets because they tend to be priced more fairly given the vast number of investment opportunities available.
We’re currently in the midst of an economic downturn that has been caused to some degree by several supposedly once-in-a-lifetime events which have all taken place in the last couple of years.
Given both its geographic position and the nature of its economy, the US is relatively shielded from most of the geopolitical tensions resulting from the war and might just be the last domino to fall.
Are there any asset classes that are particularly good value for money in this particular moment?
I would say bonds offer the best shelter during times of volatility because they are able to absorb short-term shocks and are thus more resilient.
Equity markets, on the other hand, carry more risk because it is more difficult to make predictions about how private companies will perform during volatile times.
This doesn’t mean that there are no opportunities in equities, but you need to be a daily professional trader with years of experience and with the discipline required to meticulously navigate this noise and ultimately find the day’s signal.
In general, I would say that at this given moment, the best instrument an investor can have in his portfolio is a high seniority bond in the non-cyclical sector, like the pharmaceutical industry.
At the end of the day the job of a portfolio manager is to find the right balance in allocation between this type of defensive bond and other bonds that allow us to offer decent yields to our clients – not an easy task given the dynamic nature of the current market conditions.
Is there any currency you think has the potential to compete with the dollar?
The only other currency that comes close to competing with the dollar is the Euro, though it faces far more instability as a result of various headwinds it will face in the short to medium term.
In addition to the ongoing war and its immediate effects, the bloc is also facing issues related to fiscal and monetary policy, global supply chain challenges and an energy crisis, which will only get worse as the winter sets in.
The European Central Bank is set to launch a new set of instruments that will hopefully address some of the union’s issues, but the reality is that there are far more variables when considering the European market than you have in the US.
The nature of the European Union also means different member states could have opposing interests, leading to a lack of synergy.
So, while the Euro could have the potential to challenge the dollar in the future, the present reality is that the US market remains the most liquid, and one which is simply too big to ignore.
Another potential competitor is cryptocurrencies, which could potentially compete with the dollar as a store of value especially if its adoption and acceptance by central banks continues to spread across the globe like we’ve seen in South America. But again, I can’t see it challenging the dollar any time soon.
This interview does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA under the Investment Services Act and is a Member of the Malta Stock Exchange and a member of the Atlas Group. For further information, contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta on Tel: 2122 4410, or email [email protected]