Mazars’ George Lagarias: Lack of normality means lack of visibility

George Lagarias
George Lagarias, Chief Economist at Mazars

“Meanwhile, we have to acknowledge that lack of central coordination means that pandemic-induced change is bottom up. The state of the world is currently a Jackson Pollock painting. Whatever new world emerges will not be the predictable outcome of one policy but the unpredictable net force of thousands of different policy and business responses. Focusing on individual problems still tells us nothing about the final general picture. We know very little about how inflation will develop, or the pandemic or how supply chains will respond. Up until a few months ago, at least we knew the central driver for risk assets: central bank accommodation. However, inflation has, at least for now, de-fanged central bankers.

“Here’s what we do know: US stocks are expensive and concentrated but there aren’t many alternatives to the world’s deepest and most advanced market. In fact, there are few alternatives to stocks altogether, in a world where inflation might ‘eat’ 5% from cash and bond yields each year. In fact, fixed income is universally expensive and central banks might not be able to keep buying new issuance at the current pace. An asset re-rating (vernacular for a correction in asset prices) is increasingly possible due to the QE paradigm shift. Meanwhile, inflation is here, now. All that uncertainty is bad for business. But how risk assets are going to do is still unknown, as the drivers have been for too long completely decoupled from all of the above. It could be that the ‘residual liquidity’ and ‘There is no alternative to stocks’ arguments prevail. Or it could be that markets go into ‘fear mode’ and secular volatility rises. 

“In hindsight it will all make sense, it usually does. But from where we are today, we feel that the unprecedented uncertainty mandates less tactical and more strategic positioning. In a post-QE world, where ‘beta’ strategies will be less important and ‘alpha’ strategies have low conviction, it’s a good idea to stick to ‘first principles’. Trust long-term assumptions and strategic asset allocation as a main driver of portfolio performance. Portfolio weights, such as our fixed income and duration underweight, should reflect only high conviction.

“The key takeaway from our predicament should be a sobering one: Humanity’s innate anthropocentrism and technological prowess must not lead to the false conclusion that nature has been, or may yet be, conquered. A simple virus can upset civilisation as we know it. So what does this say about much bigger threats like climate change? Environmental preservation in the years to come, will not be an option, but a necessity. Which is why this theme will become gradually even more central to our investment approach as years go by.

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