Whatever the conspiracy theorists tell you, no one will microchip your brain at the World Economic Forum registration desk in Davos to ensure perfect harmony of thought.
It’s possible that the microchips were inserted this year at the Global Collaboration Village — a “purpose-driven metaverse” — just up Main Street from the conference center, but unfortunately this correspondent’s schedule didn’t allow time to find out.
Still, the consensus on the direction of global markets in the comfortably carpeted corridors of power at this month’s annual meeting was remarkable. In short, the mindset among serious money managers is don’t believe the hype.
Markets have certainly started 2023 in exuberant form, with the MSCI World stock index gaining around 6 percent before January is even over. That brings the gain since the October low to a whopping 20 percent.
Not for the first time, this is fueled primarily by hopes that inflation appears to have boiled off and that the Federal Reserve may therefore be interested in scaling back, then halting and possibly even reversing the rate hikes that have hit many the fund manager over the past year. Futures markets show traders see a nearly 20 percent chance of rate cuts by the end of the year.
Just because this narrative has been wrong multiple times since early 2022 doesn’t necessarily make it wrong now. But it was hard to find anyone in the Swiss Alps to buy it.
Nicolai Tangen, head of Norway’s massive $1.3 trillion oil fund, is one of the party haters. With an air of Nordic frankness, he told me that sizzling market conditions stemming from the global injection of monetary stimulus after the Covid outbreak had injected a lot of “crap” into stock markets. He said the oil fund’s performance in 2022 — a 14 percent decline overall — was one of its worst runs since inception, but it would have been worse had it not decided to avoid some of those new market listings.
Now, Tangen said, much of the froth has blown off markets, but investors should accept that the Fed may hike rates again and that a long, slow, low-yield walk is ahead.
Again, big money managers, with or without the mind-controlling microchip, agree that this is a likely outcome that many investors are reluctant to accept. Investors, by and large, know that this time is different, that 2022 has taught everyone that they still don’t get inflation, and that the Fed can stay tightening longer than you can stay solvent. However, they still struggle to shake off the muscle memory built up from previous cycles.
“We believe we are moving away from a type of environment that has existed for over 40 years,” said Karen Karniol-Tambour, co-chief investment officer for sustainability at Bridgewater Associates, the hedge fund giant. “We believe we are moving into an environment where inflation will be more volatile and firmer.”
That will require prolonged tighter monetary policy, even if it can hurt the real economy and jobs.
“The market has had a couple of months to say, ‘Maybe we’re back to normal, don’t worry,'” Karniol-Tambour said. “We don’t think that’s right.”
Bridgewater’s flagship fund, Pure Alpha, returned 9.5 percent last year, which was about in line with its long-term average and delivered a performance that long-only money managers can only dream of. The rise could have been even bigger if Bridgewater had decided to participate in the fourth-quarter market rally. Instead, she stuck to her view that the effects of already aggressive rate hikes had yet to be felt and that markets were just too rosy.
Jonathan Hausman, senior managing director for global investment strategy at the $250 billion Ontario Teachers’ Pension Plan, is relatively optimistic. For OTPP, the answer is to try to look beyond short-term conflicting signals and look for more permanent bets in areas like infrastructure and real estate. It may sound boring and simple, but bonds — both corporate and government — are also a more enticing prospect as yields have risen and default risks still seem low.
But he also agreed that investors are working hard to reassure themselves that markets are in recovery mode. “The mood is schizophrenic,” he said. “There is a feeling among those in the know that the institutions – the Fed and the European Central Bank – are really in it for the long haul and are not the ones letting inflation rip. Your heart says, ‘I think this will be okay,’ but your head says, ‘I know these guys are gonna play forever’.”
As 2022 drew to a close, the notion that central bankers could prevent markets from rebounding that year was seen as a small possibility with a big risk. But it’s clear that smart money is taking this prospect seriously. Plunging headlong into this rally should be enough to give you pause.
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