Roubini, Grantham, and markets

Nouriel Roubini is at it again, with gloomy prognostications for a possible 40% fall in equities.

He got the financial crisis call right and has been well rewarded in the years since; however, he’s often still pretty bearish, and following his calls would have cost you greatly.

GMO’s Jeremy Grantham was also vocal of late about further crashes. His track record is more consistent, having called for a -3-5% 7 yr CAGR on stocks for well over 10 years now, which would have cost you, well, everything, in our view.

These are clever people, backed by strong teams, and are making a call that, if nothing else, is at least loud and clear.

In our view, there are good reasons to be bearish and good reasons to be bullish, and we are more aligned with the Druckenmiller view, which is that “in 45 years I’ve never seen a more uncertain macroeconomic environment, nor a more challenging investment landscape than I do now”. I paraphrase, but that’s pretty close.

To a degree, the extremes don’t matter quite so overmuch. It is simply not possible to deliver on the ex-ante strategic objectives of a typical balanced fund if you’ve sold everything. You’ve got to have a product that is recognisably like a standard diversified investment fund to deliver the expected risk and return outcomes investors expect. You can have a bit more or a bit less growth at the SAA level. Or a bit more of a bullish or bearish tilt at the DAA level.

But it’s got to be recognisable. It’s not hedge fund territory, where the allocations are whatever you want them to be on the day. There are stock, sector, asset and sub-asset class limits, and those guardrails are there for very good reasons (to avoid blowing up with too much risk or seeing the market compound away from you with too little risk).

It takes us back to a “turn down the noise” approach, where you ensure as much diversification as you can reasonably get, ensure that overweights and underweights reflect the intended tilts, and carry on through all the turbulence with your eye on the long term objectives of the portfolio.

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