How do we Invest in an era of Uncertainty?

Concerns regarding a recession are mounting, and higher interest rates are a headwind for stocks. Over the long-term horizon we remain focused on value investments .

For long-term investors, we identify opportunities that have deteriorated and have strong prospects in this new era of security.

Invest in Value-Oriented Strategies

Inflation will come down, in the long-term. But we are now living in a new era.

Expect Real and Core Inflation to remain above central bank targets for some time; maybe the next six months or more. An environment with inflation over 3% has historically been associated with an outperformance by value relative to growth stocks. Accordingly, we favor sectors such as energy.

Prepare for Continued Volatility

Against an uncertain and volatile backdrop, investors can consider (1) using options to improve payoff structures and hedge downside risk. They can also consider (2) drawdown management strategies.

A drawdown is an investment term that refers to the decline in value of a single investment or an investment portfolio from a relative peak value to a relative trough.

Elevated volatility in currency markets can be used to enhance returns of excess cash positions. For example, a strong USD can be used to sell the currency’s upside in exchange for yield. Commodity-linked currencies (AUD, NZD, NOK, and CAD) offer the most appealing risk-reward for such strategies.

Play Defense

Invest in quality dividend-paying stocks, energy, consumer staples and healthcare, all of which should outperform in case of a recession and help insulate portfolios from volatility.

After years of low yields, we are seeing select opportunities in fixed income, including shorter duration, investment grade credit, which can also offer portfolio resilience in a recessionary scenario.

Here’s an example.

Diversify

With recessionary uncertainty and volatility elevated, diversification can help investors focus on longer-term returns.

But how does one accomplish this?

Investing in private markets following declines in the public market has historically been a sounds strategy. Private equity remains busy on a myriad of fronts.  Private investments in software and tech have exploded to become the industry’s dominant area of focus.

Assets like infrastructure, real estate, and private markets could improve the inflation resilience of a portfolio.

Invest in Security

As the Russia / Ukraine war continues, governments and businesses are adapting to demands for greater security. The focus on security goods, including food and energy, is leading to tightness in various commodity markets. This will support higher raw material prices in the months ahead.

Longer term, demand for EVs, carbon-zero, cybersecurity, and agricultural yield enhancement will all be boosted.