As markets continue to look through what Myooran Mahalingham calls the “fog of uncertainty”, the pandemic and its after-effects have made one thing clear: the range of possible outcomes in the short and medium term is so vast that now is not the time to make grandiose investment decisions.
The MLC Asset Management portfolio manager for global equities attributes much of the uncertainty to the variables around Covid-19’s effect on the economy and the spectre of a vaccine that could, at any time, dramatically reshape the global market outlook.
“It isn’t time to be heroic,” Mahalingham tells Investment Magazine. “When it comes to forecasting economic growth, economists typically vary by +/- 0.25 per cent. Now, the range is huge: some vary by up to 10 per cent, which indicates a huge range of uncertainty.
The portfolio manager uses the example of JP Morgan, the world’s biggest bank by market capitalisation which accrues around $30 billion in revenue per quarter.
“So far, JP Morgan have set aside US$34 billion to meet losses from the pandemic-induced economic decline,” he explains. “Jaime Dimon – the CEO – said that in a positive scenario involving a vaccine and re-opening of the economy soonish, they have probably set aside $10 billion too much. But if there is a slow reopening with an elongated path towards a vaccine solution, then they have set aside $20 billion too little.”
The fact that the largest banking organisation in the world has a $30 billion delta in its range of expectations, Mahalingham says, highlights the reality all investors need to face; there are far more unknowns than knowns in the current environment.
It took six years for the US hospitality and tourism industry to recover after the World Trade Centre attacks, he recalls. The lesson here is that relatively unprecedented events can’t be modelled with a high degree of accuracy, and future economic normalcy is not something easily forecasted.
There is a Danish proverb that applies to the investment landscape today, he says: “It is very difficult to forecast, especially about the future.”
Mahalingham will be speaking on the MLC Investment Insight Series broadcast this coming Wednesday entitled Finding growth after lockdown: Equities in a de-globalised world. Register here for your complementary digital pass.
As ever, Mahalingham says, the fundamentals of investing remain paramount.
“It’s prudent to be diversified and to be careful on how you deploy your capital,” he advises. “Rather than making top down calls on sectors or countries, it is better to focus on a set of characteristics that should stand you in good stead: namely, strong balance sheets that can survive a prolonged lockdown, as well as earnings, margins and revenue that are either robust today or have a path to normalisation once the economy recovers.”
Naturally, he says, price remains key. Value investing may be at a relatively low ebb, but the market extremes need to be taken with a degree of equanimity. “Value is so out of favour that it is very difficult to see this underperformance being sustained,” he says. “But when that reversal will happen is a big question.”
Value can definitely make a comeback, Mahalingham says, but exactly when is hard to predict – another reason to remain vigilant and resist the temptation to make “heroic” bets.
“If you take a longer-term perspective, there are strong arguments for both [growth and value] approaches to work. I think it will be more about ensuring you don’t step on any landmines in the short term.”