We’ve bought some small cap, some emerging market, some property, and some infrastructure exposure, over recent months.

We’ve done this not because we think the global growth outlook is great, but rather because those asset and sub-asset classes had been hit very hard through inflation.

Inflation does look to be on the way out, and hence a reason to nibble at the spaces that have been most affected.

Now, if inflation overshoots, to the downside, because growth falters, and a recession beckons, those sorts of exposures will get hit again, but, for a different reason.

So, for the most part, we’ve either lifted them up from near zero, in the case of EM and Small Cap, or to modest overweight (a few percentage points) in the case of property and infrastructure, and hence the bets are not overly large in either absolute or relative space.

Why mention all of that.

Well, because the path to soft landing is narrow. The market is a little skittish, and it won’t take much (say, a negative non farm payrolls print in the US, or similar for here in Australia) to switch the narrative from “yay, soft landing” to “look out!”.

Europe already looks on the brink of recession. There is no way they can maintain rates as high as the are (proportionate to the US), nor is there any way they can price the same degree of cuts, as the US, given the economic underfootings.

And if Europe goes into recession, that will be another pocket of equities that suddenly becomes, on a 3-5 year DAA view, much more interesting, in the same way as the above points on small cap, value, EM, property, and infrastructure.

We narrowed our energy underweight by about half, earlier in the week. We did so because the price of oil had dropped back into the range where the Strategic Petroleum Reserve is keen to buy, and also because we usually want to buy commodities not when the commodity price is high (like it is for iron ore) but rather when nobody wants it, and the price is low. That’s usually when you get the better ex ante returns, in commodity land.

But, it also raises the odds of buying too soon, and the best you can do on that front is a) momentum overlays, if that’s your thing, or stop losses, as a part of technical response, or b) just right size the bet and wait.

We tend to prefer b). But the point about oil here is that oil is potentially weakening because of the global economic backdrop. Issues around Israel, Hamas, the middle East more broadly, Ukraine, Russia, and their impact on hydrocarbons, could just be “muddying the waters around an obviously weakening marginal buyer”.

And so, we are by no means “out of the woods” on the mix of inflation and output (global growth) and the various forms of fear that they take (e.g. falling too much, not falling enough).

Note of course, you only need to change the frame or the lens by an inch or two, to completely change the interpretation.

Consider the below, from Michael Antonelli:

“Your telling me rates are back at $4, oil is below $70, forward earnings are rising, the stockmarket is near all time highs, productivity is rising and inflation is falling, and I’m supposed to be bearish!”

Anyway, some capital deployment, is the point of the note, because things that were hit hard became more attractive on a 3-5 year view, as opposed to “Mortimer, we’re back!”, and the recognition that if things really do darken, well, there’s these other big pockets of the globe where value and diversification would make for compelling additions.

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