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Perspective Approaching uncertainty in a noisy world

Sar Malik
February 4th, 2021 · 3 min read

The economic and political shocks that have hit the global economy following the 2019-20 health crisis have generated uncertainty for investors not seen since the great recession. A disciplined response and strategic framework to create a trajectory of growth for your business is essential.

For the past decade, publicly traded equities have lived through a cycle of hyper-normalized growth. The lofty valuations of technology providers has proven to become more and more resilient to adverse volatility and extraneous shocks. This is true now more than ever, the sharp pullback following U.S. business closures in Q1 of 2020 demonstrated a follow-through rally in tech sector above and beyond prior multiples on earnings.

“The perception of unconstrained growth is extremely dangerous.”

What’s happening behind the scenes is a rising uncertainty in growth forecast estimates made by analysts as to earnings projections, making it more difficult for investors and policymakers alike to understand the context of the operating environment. To put simply, it’s more difficult to identify the winners and losers, to get both sides of the story, and nearly impossible to agree on the status quo on the direction of markets.

Value investing principles applied would indicate “fair-value” of $SPX between 1600-2000. As of this article, S&P500 trade above 3,100.

Context of Risks & Opportunities

Because we are living in such a globalized world, we can’t be sure about where an economic shock might occur. China proved to be the epicenter of a health crisis that quickly spread across the globe in part due to lack of information. In the context of markets (for any instrument type such as CLOs, derivatives, debt securitization, etc.) estimating the potential sources of future growth is becoming opaque.

To learn more about global diversification, consider our perspective on Catalyst Opportunities: Emerging Markets as the next-phase of growth.

We can acknowledge the sophistication of AI-driven tools for market, sector, and indices analysis.

Sentiment analysis models are often leveraged by active fund managers to gauge outcomes of world events based on streaming social media data.

What’s missing is the insight needed to help stabilize global economic pressures and improve prosperity, and broader living standards. The very idea of an economic shock, particularly health driven, has significant negative implications on society as a whole. The ability of retail investors to be certain based on mainstream media reports as to what is going to happen in the economy over the next few years is going to be in very dire shape.

Framework for Managing Recovery

The first thing that any executive or policymaker should consider is to realign the operating model of the organization. The business should be dynamic and flexible enough to allow for responsiveness to events outside the realm of normal thought. It should reflect the idea that we are in a very turbulent world, and that the world’s changing and servicing client needs means adapting to the position of the client.

Another key factor for consideration is to be more direct about when the decisions are made. Far to often, investment allocators maintain the status quo expecting Y-Shaped or U-Shaped recovery with risk priced-in to capital allocation. However, the overall direction of an organization needs to have the right capabilities to deal with a digital-first economy. That may require drastic steps to transforming the IT architecture, operations, and appreciating the value of an agile, remote workforce.

When these ideas are blended into an action plan, the best way to test the potential outcomes is to undergo simulations of operating conditions.

There’s no doubt that we’re in a noisy world and continuing to experience unprecedented global events. Adapting your business to first acknowledge extraneous conditions as the new normal, and delivering value for clients in a responsive manner will be critical to coming out the other end with a competitive position.

Get in touch to learn how we can deliver a risk management strategy with controls for data-driven compliance across your business.

About: Perspectives are from the viewpoint of the author designed to invoke thought leadership for further strategic analysis of a given sector or topic.

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