How investors can manage Omicron uncertainty

Omicron is adding uncertainty to investing at the moment. Here Pendal portfolio manager Samir Mehta discusses how to approach investing in periods of doubt

• Investors face weeks of uncertainty with Omicron
• Barbell strategy a way of approaching investment uncertainty
• Find out about Samir Mehta’s Pendal Asian Share Fund

INVESTORS expect weeks of uncertainty as lab technicians probe the Omicron variant.

How to tailor portfolio construction in such times?

It is an apt question in a week where unexpected Covid variants have roiled markets. But the important thing to remember is that uncertainty has always been a feature of investing, says Samir Mehta, who manages Pendal Asian Share Fund.

It’s not just the big unforeseen events that are difficult to predict, he says.

Mehta points to records of Treasury bond yield forecasts from the Society of Professional Forecasters — the oldest quarterly survey of macroeconomic forecasts in the United States conducted by the Federal Reserve Bank of Philadelphia.

Year in, year out for the past two decades, America’s top economists have predicted that bond yields will rise.

As you can see below from this analysis by Bianco Research, year in, year out they have been by-and-large wrong.

Bond bearishness has been a constant for decades, and horribly wrong for decades. pic.twitter.com/noSV4aN23r

— Jim Bianco biancoresearch.eth (@biancoresearch) November 19, 2021

“Humans by nature — especially in our industry — need to appear knowledgeable. And to appear knowledgeable you have to come across as if you know a few things,” says Mehta.

“At the moment, it seems like the rational thing to do is to consider the possibility of interest rates going up because that’s what everyone is saying.

“But there have been so many instances where we’ve been in similar positions like this, and the forecasts have been consistent for rising rates, and they just have not panned out as expected.

“There’s this big tug of war and I have no clue as to which way it will go.”

How to manage uncertainty

So, what do you do when you don’t know what will happen next?

“The question is how do you make decisions in an uncertain environment,” says Mehta.

“And that’s the job. Not just for people like myself, but so many professions involve decision making under uncertainty.”

Mehta says a simple way to construct a portfolio in uncertain times is to use a “barbell strategy” where a portfolio is weighted to opposing outcomes.

“If you do not have conviction on outcomes, you want to hedge your bets. That’s what a barbell is,” he says.

Find out about

Pendal Asian Share Fund

Read more

“You have enough on both sides so that you don’t get caught on the wrong end of either of them and as evidence start to accumulate, and you get more conviction, you move towards where the evidence is taking you.”

Mehta says the biggest unknown in markets remains whether inflationary pressures are transitory or here to stay.

“Let’s say the forecasters are right, that inflation is likely to be trenchant and not transient.

“That means 10-year bond yields and interest rates around the world have to rise.

“The question becomes which countries, sectors and companies are likely to be uncorrelated to the effects of rising inflation and rising interest rates?

Investing in Asia

Mehta says investors could look to Southeast Asia for this exposure.

“Southeast Asia is neglected, completely out of favour and cheap. But countries like Indonesia and even the Philippines are benefiting from the reflation due to commodities.”

And China should also be back on the list in a barbell approach.

“China is completely out of favour — but it is the one country that has acted diametrically opposite from all others from a central bank action perspective.

“The People’s Bank of China has tightened monetary policy, not allowed lending to get out of hand, the property bubble is coming under strain, GDP growth is affected.

“If the Western world goes into a rising interest rate, rising inflation environment, could we anticipate China doing the opposite? Should we be alive to the fact that liquidity conditions in China could start to become benign at a time when the rest of the world is quite negative on China?”

And what’s on the other side of the barbell?

Here, Mehta says a well-structured portfolio should own the companies that will continue to thrive should inflation prove transitory.

“I want to have some part of my portfolio in structural winners and growth in case forecasts of rising interest rates based on rising inflation turns out to be wrong.”

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Find out about Pendal Asian Share Fund

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager.