February 2023

Déjà vu, according to Wikipedia, is a French loanword for the phenomenon of feeling as though one has lived through a present situation before.

It was exactly a year ago that we wrote two articles, Fight Flight or Freeze and Inflation, Asset Allocation, Patience and Other Challenging Things in which we addressed concerns expressed by investors for the fact that our multi asset funds were not holding equities while markets were running…hard!

And now, simply speaking, it feels as though the replay button has been pressed and we are experiencing déjà vu – equities have taken off like a jack russell out of an open gate and we are 100% exposed to local cash. But, as with most things that appear as simple, there are underlying tides of complexity that will in due course result in flotsam and jetsam, lagan and derelict.

While we have held a reasonably constant position since exiting equities at the end of August 2018, we have watched as global markets vacillated between fear and greed.

We recognise that our multi asset funds are positioned differently to the typical multi asset fund. The objective of the Gryphon funds is to protect capital and deliver inflation-beating returns. Our method of delivering on this objective is to expose investors to the prevailing asset class offering the best risk-adjusted return.  This objective has resulted in a return profile considerably less volatile than the riskier asset classes, namely bonds or equities.

Considering what the various asset classes delivered over the period of last year (2022) it turns out, with the benefit of hindsight, that the positioning of these funds served investors well. The graph illustrates the return of the Gryphon Prudential Fund (purple line), cash (green line), local equities (red line) as well as the average of our peers in the Multi Asset High Equity Category (black line).

One of the major differences between now and a year ago (besides the obvious war situation) is that a year ago cash offered investors a return of 4.5% whereas an investor can now get 8% without much risk. Until such time as our indicators signal a return to equities, we are likely to hold our position supported by the following reasons:

  • Much of the growth seen in the globe today has been in the form of price rather than volume.
  • This has led to inflation which we expect to remain higher for longer than generally anticipated, whereas global markets reflect pricing that sees inflation back at 2% before too long.
  • The recent upward revision of U.S. Core CPI illustrates the consequence of placing too much weighting on a single data point while ignoring the trajectory and other risks.
  • We see earnings for Q1 2023 being muted. While many in the market see earnings beating estimates, the fact that earnings are falling is not good for valuations.
  • Earnings will seldom disappoint for only a single quarter; historically this lasts a few quarters.
  • We consider the layoffs at large technology corporations to be the beginning of a period of sub-par earnings, not the end.
  • Elevated operating margin levels are a concern to us; we believe they are more likely to decline than expand.
  • The U.S. 10 year bond is now yielding in excess of 3.7%. TINA (There Is No Alternative) no longer applies as it may have done in the regime of zero/negative interest rates – cash rates have risen significantly across the globe.
  • Fundamental financial wisdom states that increased discount rates generally result in lower asset prices – we see this principle continuing to apply.
  • Interest rates: spreads between both the U.S. 10-year yield – U.S 2-year yield and the US 10-year – U.S. 3 month interest rate reflect inverted curves which historically have presaged a recession.
  • Quantitative easing and tighter monetary policy: global central banks pumped liquidity into global markets up to and through the COVID-era, and fiscal largesse by global governments contributed to the mix; those halcyon days are coming to an end!
  • Asset price tailwinds have become headwinds. This, coupled with the aggressive monetary policy tightening cycle embarked upon by the U.S. Federal Reserve and other global central bankers, will impact global economies, albeit with a lag.
  • China abandoning their “zero-COVID” policy has resulted in rising commodity/asset prices as investors view China to come to the rescue of the world economy (as happened in 2011).
  • In our view, because the Chinese economy is still secondary to the U.S., it is not able to grow sufficiently to compensate for the slowdown in U.S. economic growth.
  • Our fundamental concern with regard to China remains the fact that there has been over-investment in infrastructure which will yield sub-par returns. Capital misallocation of this nature tends to be a drag on growth for an extended period of time.
  • Furthermore, the slowdown in China’s population growth rate is not supportive of increasing growth in the long term.

While we rely on our indicators to signal the appropriate asset allocation, much of our work entails ensuring a breadth and depth of understanding of the environment in which the indicators function. We are committed to engaging with investors and interested parties seeking to better understand our approach. We constantly evaluate and test the integrity of our process in order to reduce the likelihood of being ‘side-swiped’ by the unexpected. If you would like to engage directly with us, please do not hesitate to get in touch.

“Not being tense but ready. Not thinking but not dreaming. Not being set but flexible. Liberation from the uneasy sense of confinement. It is being wholly and quietly alive, aware and alert, ready for whatever may come.”  ~ Bruce Lee, Tao of Jeet Kune Do