A man is born gentle and weak; at his death, he is hard and stiff. All things, including the grass and trees, are soft and pliable in life; dry and brittle in death. Stiffness is thus a companion of death; flexibility is a companion of life. An army that cannot yield will be defeated. A tree that cannot bend will crack in the wind. The hard and stiff will be broken; the soft and supple will prevail.
Laozi
Laozi (Chinese: 老子, Mandarin: [làu.tsɹ̩]; commonly translated as “Old Master”) also known as Lao Tzu (/ˈlaʊ ˈtsuː, -ˈdzʌ/), and Lao-Tze (/ˈlaʊ ˈdzeɪ/), an ancient Chinese philosopher and writer, the reputed author of the Tao Te Ching, founder of philosophical Taoism, and a deity in religious Taoism and traditional Chinese religions, a semi-legendary figure who is thought to have lived around the 6th-century BCE, taught us this lesson.
A lesson that could also be applied in the current market context. Geopolitical tensions, rising inflation, and slowing economic recovery have stiffened investors, worried by the uncertainty that permeates the markets, that in the last six months showed generalized declines, double-digit ones for the most speculative assets, technology stocks, and crypto assets in the first place.
In this complex context, a flexible strategy, combined with an active approach based on risk management, seems to be the only possible way to invest. The future of the financial markets does not look rosy, due to the risk of recession and very high inflation. Even before the invasion of Ukraine and the new lockdowns in China, experts’ analyses and forecasts already indicated slower economic growth and longer-lasting inflation than previously expected for 2022. The latest events have therefore only accentuated trends that were slowly moving forward.
Although most American non-financial companies have posted better-than-expected results and therefore have sound fundamentals, financial markets continue to be driven by macroeconomic issues, such as inflation. High inflation has historically correlated with lower returns on equities. Therefore, with high inflation, a flexible strategy suggests reducing the exposure to equities. However, there are companies that are relatively immune to the ups and downs of the economy or that offer good visibility on profits that we may want to include in our portfolio of well-diversified investments. In general, value stocks tend to perform better than growth stocks in high inflation periods, and growth stocks tend to perform better during low inflation.
The current context of slowing growth and inflation also suggests maintaining a certain level of liquidity that will allow us to seize the opportunities that a turbulent market presents or when the waters are calmer. Moreover, with interest rates increasing, liquidity in a bank may offer some sure return.
Then there exist Inflation-Linked Bonds (ILBs), which we talked about in a recent article, that would protect our investment from high inflation and add diversification to our portfolio.
Thus, a winning investment philosophy is to identify and choose a range of instruments as vast and heterogeneous as possible, both in terms of their geographical location and the market segments they represent, and adopt a long-term investment horizon. This approach makes it possible to respond quickly to market changes and mitigate risk. It is precisely the wide range of asset classes combined with a disciplined approach that allows you to seize multiple investment opportunities and profit from market fluctuations. A proactive and flexible approach on the one hand is able to protect the portfolio in times of market downturn, while on the other it allows taking advantage of the performance drivers that emerge as soon as the market starts to recover.