That was the daunting question addressed by panelists at Portfolio Adviser’s Autumn Congress last week.
Since 2008, the macro picture has largely been a central bank story. One by one, central banks in developed markets have swooped in to save the day by initiating quantitative easing (QE) measures to buoy struggling economies.
This begs the question whether playing around with tactical asset allocation is an effective strategy in the current scenario.
Or, as Thomas Miller Investment’s Andrew Herberts lamented: “It feels like the only reason we are looking at macro is to second guess what the central banks are going to do.”
Swimming against the central bank tide
Judging from the last time the Fed initiated QE proper back in the 1930’s, Neil Williams, chief economist at Hermes Fund Managers, said it is reasonable to expect we are only halfway through the current QE cycle that began in 2008. As such, it makes sense to swim against the central bank tide.
“The time when we can focus more on macro analysis and be selective in that respect is a time when this blanket of liquidity begins to lift,” he said.
“I can't see a time when that is imminent. In which case, the best use of macro is to best guess what central banks are doing, how they are viewing things and what they may do.”
“I don't think in aggregate you can hide from macroeconomics,” agreed John Roe head of multi-asset funds at Legal and General Investment Management.
“The reality is if Janet Yellen comes out tomorrow and says something hawkish, it moves all markets. If OPEC changes its supply of oil, it moves markets. You can't hide from it. You can diversify from it by asset class or within asset classes as long as you move as far away from the indexes as is humanly possible."
Roe continued: “Really it comes down to finding a mix that gives you a reasonable range of outcomes, which is very difficult in a low-yield bond world."
“We own lot of US treasury inflation-protected securities (TIPS) not because we think inflation will go up but because we think at 1.8% over 10 years that is a reasonable entry point in a world where valuations in a lot of areas look stretched.
"Similarly, I own a lot of nominal assets like emerging markets, credit and high yield because in a world where we get a continued grind lower, the yields on those assets will continue to fall."
For Amanda Sillars of the Jupiter Merlin fund of funds team, it is possible to get to grips with the central bank QE reality to find opportunities for clients, you just need a more targeted approach.