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The Case for Macro

Our Dynamic Allocation Strategies team explains why global macro investing offers many potential benefits when included in an investment portfolio. Read More (PDF)

Emerging Markets Outlook for 2017

The past 12 months have been fairly turbulent in emerging markets, but a number of factors support emerging market performance.  Read More (PDF)

Largest Macro Opportunities Have Tail Risks

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In today's global macro environment, the largest investment opportunities also possess significant downside tail risks. That means the most attractive valuation opportunities exist in markets and currencies where there is geopolitical risk or negative macro thematic influences.

The most fundamentally attractive global equity markets are in Europe, including Italy, Spain, the United Kingdom, and France. And in each of these countries we have political and policy uncertainty, driven largely by the influence of populism.

The safe havens of the world have been relative beneficiaries of such geopolitical developments elsewhere. This means that the United States—the U.S. is treated as a relative “safe haven” by investors even with President Donald Trump—Japan, Germany, Australia, and Canada don’t offer much opportunity from a valuation perspective. In emerging market equities, Russia—not exactly a safe haven—is fundamentally very attractive, and Brazil and South Korea—two countries where the sitting presidents have been removed by the courts—are also relatively attractive.

Our investment process framework helps keep us in the game despite short-term geopolitical disruptions. And, unlike many investors, we don't just pile blindly into safe havens and ignore opportunities with potential tail risks.

In currencies, the British pound is about the only attractive developed world currency. But there are significant opportunities in emerging market currencies, such as the Mexican peso and the Philippine peso. Of course, Mexico is on the front lines of the anti-trade and anti-immigration policies of the Trump administration. While in the Philippines we currently observe a(nother) maverick president in office (President Rodrigo Duterte) who has been taking an aggressively populist stance. Again, in the emerging market space, the large fundamental opportunities exist where there are geopolitical risk and downside tail risk.

Don't Sit on the Sidelines

Many investors are concerned about geopolitics and populism and the standard response is to retreat to or remain on the sidelines where opportunities are being clouded by such risks.

As a part of our process, however, we use a framework to assess these geopolitical risks to better understand the potential investment opportunities and risks. Fundamental valuation analysis is our foundation and this first stage identifies where medium-term opportunities exist. The second stage in our investment process helps us ascertain why and when to step into these opportunities. This stage, in part, leverages macro-thematic analysis and borrows from game theory to determine the investment implications of geopolitical developments.

This framework helps keep us in the game despite the potential for short-term disruptions. These geopolitical events don't force us to the sidelines all the time, and, unlike many investors, we don't just pile blindly into safe havens and ignore opportunities with potential tail risks.

Investment Implications

In fact, over the past few months, we have been selectively increasing exposure to those markets and currencies where such tail risks exist.

Since the U.K. referendum in June of last year, we have increased our long exposure to both U.K. equities and the British pound. On the eve of the Italian referendum, when we perceived the downside risk had already been priced into Italian equities, we increased our exposure. And as the risk of a populist win in the French elections fades away, we’ll take a closer look at the equity opportunity in France. At the same time, we have also significantly reduced our exposure to the safe-haven U.S. equity market. Most recently, we increased our long Russian equity exposure in response to fading risks, including less downward pressure on oil prices and stabilized inflation.

On the currency front, in addition to our long exposure to the British pound, we re-risked our (long) Mexican peso exposure and recently increased our Philippine peso exposure, making it one of the portfolio's largest currency positions.

These exposure changes are a reduction in safe-haven exposures and an increase in those exposures that are fundamentally attractive but contain geopolitical tail risk that many investors are currently avoiding—this reflects a shift in our stance from recent quarters.