Being the token Aussie within Kames multi-national bond team, I need not have feared a lack of commentary from my colleagues on the topic of the Australian Cricket team’s recent ball-tampering scandal. Regrettably, this format does not allow for a full examination of Scottish, Bulgarian, or even Spanish perspectives on the concept of fair-play or the deep traditions of the great game. Anyone wishing to read more about the scandal, I do commend you to have a look at the Aussie press, who are covering it with their renowned sense of understatement and proportion.
Anyway, looking to the future of the Australian team I encountered an alarming statistic; some 35% of all Australian test cricket runs since 2013 have been scored by Steve Smith and David Warner, the captain and vice-captain who have been side-lined for a year as a result of the scandal. Their absence will place a great deal of pressure on their replacements to be sure, but more pertinently, on the rest of the batting order who have often had their own performances bailed out by their erstwhile teammates. Time will tell, but you do not need to be a cricket tragic to realise this will prove a significant challenge.
In much the same way, global asset markets are facing a similar challenge. Our superstar players – The Fed, ECB, BoE, and BoJ – have all indicated that the glut of central bank liquidity, which has carried the global economy and asset prices along, may be coming to an end sooner rather than later, with the ‘sooner’ part coming into sharp relief on the back of improving economic data. Markets will have to learn to get along without the soothing realisation that evermore central bank support will be there to float all asset prices higher, much as the Aussie top order can’t rely on ‘Smithy’ to bail them out with yet another effortless century. Thank goodness. In my view, the reawakening of volatility in bond and equity markets we have seen in 2018 is the result of participants belatedly rediscovering asset valuation on factors other than central bank largess.
Part of our core view for 2018 had been for the return of dispersion as idiosyncratic risk came to the fore, as the beta-driven QE trade dissipated. The volatility should be seen for what it is – a process of adjustment rather than the beginning of the end. This environment demands a closer examination of business models, cash flow, and financial resilience for the companies you invest in. Assets with flimsy intrinsic valuation will find this being examined, often brutally (hello Tesla). For the rest of us, this volatility presents an opportunity to add to positions in those firms that set to benefit from what is, remember, an improving global growth story. In navigating this environment, we are convinced that selecting an active manager who has been consciously avoiding areas where we see QE-driven excess, and identifying the overlooked and more attractive parts of the high yield market is the right thing to do.
Failing that, I am sure I can find some sand-paper.