The Hazan: Rabbi Raphael Elnadav z.s.l.
By: Ian Bremmer And Lisa Shalett
For at least 40 years, growth has been the investor’s watchword. Success typically meant crafting a portfolio of stable, mostly U.S.-based stocks and bonds that would grow predictably—not in a straight line but with relatively brief interruptions that would be more than counterbalanced by long stretches of economic expansion. The fundamental strength and resilience of the U.S. economy was the unquestioned foundation on which investors could always build.
But three years have passed since the crash and the global recessions it caused. Now we need to balance that view of the world—and that style of investing. The credit crisis and Great Recession were merely the most dramatic consequences of an ongoing tectonic shift in the balance of power between the developed and emerging economies that has been decades in the making. Such periods generally are always accompanied by enormous turbulence—and fear, as the markets’ recent wild swings may have already begun to express. And more shocks are doubtlessly coming: climate change, inflation in world food prices, natural disasters such as the Japanese earthquake and tsunami, as well as well as manmade upheavals like the Arab Spring. As humans, we will, as always, adapt and reengineer. As investors, we must be prepared to do the same.
In disruptive times, even the most conservative strategies (buy-and-hold; stay close to home) may not be so conservative at all. Navigating an age of risk requires meeting risk head-on, actively and dynamically, and venturing into the strange world of the global economy. That’s the tough way of looking at it. Seen another way, disruption most always creates opportunities.
Call them the new rules for global investing—a set of strategies investors might take into consideration to position themselves for resilience, sustainability and growth:
Be even more global. As nations turn more inward to deal with their domestic challenges, investors may need to become that much more international in their search for growth, yield, quality and effective ways to manage risk.
Be more dynamic. Although “buy-and-hold” isn’t exactly obsolete, investors may need to consider more dynamic, tactical and flexible approaches in seeking to reduce risk and maximize returns. This may include investments that explicitly manage downside market exposure, like Market-Linked investments. In selecting mutual funds, investors may need to consider expanding the search to include managers that have broader mandates, with the ability to hedge positions or to range across borders and asset classes.
Getting yield from multinational stocks. Consider seeking corporate dividends as a more important source of yield; as U.S. multi-nationals deploy the cash on their fast-improving balance sheets to lure investors in volatile markets.
Seeking the potential stability of emerging market bonds. With U.S. Treasury yields at historic lows, global fixed income becomes more attractive, especially in markets that pair higher interest rates with currencies potentially to be buoyed by influxes of foreign capital. (A stronger local currency makes for stronger real returns when bonds are converted back into dollars.) Experienced globalfixed-income managers can help source the right combinations of currency strength and yield.
Buying direct exposure to overseas equities. While investing in U.S.-based multinationals gives some access to emerging market growth, it could be prudent to haveassets that provide more direct exposure to some of the world’s fastest-growing economies. Experienced global fund managers, again, can be critical in this area, particularly if combined with index-based investments that manage downside market exposure in less established markets.
Reducing risk with commodities. One of the world’s most volatile asset classes is also one of its best diversifiers. Although owning commodities poses a number of unique risks, doing so can potentially reduce overall portfolio risk by providing a hedge against potential scarcities of these vital resources that can raise production costs and hurt corporate earnings and consumer spending alike.
Investors now face a world they likely never foresaw. The more successful investors will be those who adopt the flexibility, both in mind and in portfolio, to see and respond to the world as it has become.
For more information, contact Merrill Lynch Financial Advisor Morris Betesh in the Rockefeller Center office at 1-212-382-8520 or ads.communitym.com/morrisbetesh
Ian Bremmeris the president of the Eurasia Group, a leading consultancy on geopolitical risk. Lisa Shalettis the chief investment officer for Merrill Lynch Wealth Management. MLPF&S is a registered broker-dealer, a registered investment advisor and Member SIPC. Investment products are not FDIC insured, are not bank guaranteed, and may lose value.
This article, co-authored by Ian Bremmer was prepared under an agreement with Eurasia Group and is provided for informational and educational purposes only. Although this article discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions, it should not be construed as research or investment advice. Unless stated otherwise, the opinions expressed are those of the authors as of 10/20/2011, do not reflect subsequent events and are subject to change. The article is not intended as an endorsement of any specific investment strategy. It has been prepared solely for the purposes of illustration and discussion. It is not complete and should not be relied upon as such. Certain information contained herein may constitute forward-looking statements, opinions or beliefs. Due to various risks and uncertainties, actual events or results or actual performance may differ materially from such forward-looking statements, opinions or beliefs, and undue reliance should not be placed thereon. Investing involves risk. Investing in foreign and emerging markets involves currency and policy risks. Some alternative investments may not be appropriate for investors. Always consult with your professional advisors before making any investment decisions.