Tuesday, May 5, 2020

Investment Strategy - 1

Last week, I had shared latest update relating to my investment strategy. I had highlighted that we may be standing at the threshold of a new economic and market cycle. The global economics, politics and markets may change rather dramatically in next couple of years, in the aftermath of the current crisis. I have therefore decided to reorient my investment portfolio to suit what I believe could be the shape of the new world. (see here)
Many readers have expressed surprise on my decision to (a) raise the weight of equities in my asset allocation; especially at this point in time when almost everything appears uncertain and future is shrouded in thick black clouds; and (b) prefer Neutral currencies like Cryptos over USD and Gold. I would like to address the inquisitions of the readers as follows.
It is pertinent to note that I have been expecting a paradigm shift in the global markets for past 5 years now (for example see here). Especially in past 5 years there have been many indications pointing to the shift taking place, though at a subtle pace.
Sino-US tariff conflict; virtual dismantling of SAARC, launch of ambitious Chinese projects like Chine Pakistan Economic Corridor (CPCE) and One Belt One Road (OBOR), Exit of United Kingdom from common European Market (EU); negotiations over new economic blocks like Regional Comprehensive Economic Partnership (RCEP) & Trans-Pacific Partnership (TPP) agreement, US-EU trade renegotiations; US-Japan trade conflict; Indo-US trade conflicts; Indo-Arab realignment; enhanced Indo-Japan trade relationship; decision of US to completely exit Afghanistan; fissure in the cartel of large oil producers (OPEC+), and strong reemergence of socialism in the developed world are some of the indicators pointing towards the shifting paradigm.
When I say that the paradigm is shifting in global markets, I am certainly not suggesting "it is different this time". What I am essentially saying is that "it is the same as always".
I have also written this couple of times before (see here), the global market paradigms have shifted every few decades. The shifts have been caused by a variety of factors. Sometimes it has been led by shift in strategic and geo-political power (spread of European empires in 17-18th centuries and strength of US post WWII). Sometimes technology innovation (industrial revolution in Europe and US, post-war Japanese manufacturing renaissance and then internet revolution in US) caused the shift. Rise of oil economies post 1970's in middle east Asia and Chinese and Korean manufacturing revolutions have also caused material shift in global markets. Nature has also played vital role in causing tectonic shifts in global power equations and market balances. Decline of great Roman empire is case for study.
In most of these market transition phases, currencies have played a key role. Therefore it is pertinent to evaluate the current transition in global market paradigm from this angle also. In most earlier instances the emerging currency (including gold and silver in earlier instances) has changed its relative global value during the course of the shift. Sometimes strength in the currency or gold & silver stock played a critical role, as in case of British and Portuguese dominance in earlier centuries. In some cases weakness in currency supported the shift, as in case of the rise of Korean and Chinese manufacturers causing decline of Japanese dominance.
The present case appears no different - Chinese are trying to establish their supremacy in global technology, economic and political affairs by becoming a primary challenger to the US hegemony; Japanese are trying to regain their lost market share in global manufactured goods market by depreciating their currency; Germans are struggling to retain their market share by forcing the Euro down; and EMs like India are trying to establish a foothold in the global markets.
US have so far been successful in reigning its currency without compromising the supremacy of dollar. But this situation may not last longer. ....to continue tomorrow

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