Alberto Matellán, Chief Economist at MAPFRE Inversión
Analysts are now more than ever going to great lengths to calculate estimates of GDP, profits and other economic variables for the near future. A look at the set of forecasts shows an array of possibilities that is broader than ever, showing the difficulty of this task in current circumstances. As a result, forecasts that normally serve as a guide for investors have lost some of their ability to contribute to the analysis.
This adds a layer of difficulty to the work of asset managers that has rarely been seen before. Professional investors work with an expected scenario or with a reasonably limited range of scenarios. Although the future is, of course, uncertain, having a reference in the form of forecasts facilitates decisions and provides at least one framework for consideration. Few things are more uncomfortable for managers than operating without that scenario to hold on to. Therefore, when the support of forecasts is somewhat weaker, it can be useful to focus on what we do know or what we can deduce with some degree of certainty. There are at least three areas in which a detailed analysis of what we know frees us from being dependent on forecasts.
Firstly, it seems obvious that normality will not return if we consider normality to resemble time before the crisis. For at least two years now, we have been talking about far-reaching changes to the structure of the global economy, which, among other things, include relocating production chains. As a result, world trade is on the decline. This process is being accelerated by the crisis. Once things are open again, we will find ourselves in an unprecedented economic world, and in the face of which, economic modeling would be limited given its dependence on comparing the recent past. This is one of the reasons for which the current forecast dispersion is so enormous. In this case, asset managers can use qualitative data to consider the possible economic structure of the post-crisis world. In order to help them in this task, they turn to specialists from other fields, such as sociological, political or health, among others. This type of multidisciplinary support may become essential in the future context.
This economic paralysis is having a colossal impact on corporate profits — some companies will benefit, while others will not survive. Equity managers are tasked with identifying companies that will survive based on their cumulative cash situation or their readiness to adapt their business model, for example. This does not need precise or particularly accurate forecasts, but a thorough analysis of the current situation. It requires managers or analysts to revisit a part of their roles that had often been simplified thanks to the support of profit or growth estimates. Now, further analysis into each company will, quite possibly, result in stronger investments, with better knowledge of businesses and with the assessment of more non-financial parameters.
Lastly, sovereign fixed income, considered a less risky asset, is a hot topic at present. Public accounts around the globe will deteriorate as a result of mass fiscal support. Thus, the credit risk of sovereign fixed income assets is growing. On paper, this leads to an increase in bond yields and thus investor losses and greater cost to governments. However, there are at least three forces at work here: An unprecedented injection of liquidity, the fact that the relative position between countries changes very little, and the intervention of central banks in the market. Therefore, there is no agreement on the evolution of these yields or the famous risk premiums, nor a reliable way to anticipate them. In this case, making investment decisions based on the forecast of major internal rates of return due to an increase in debt implies forgetting many relevant parameters that, in the last ten years, have invalidated this reasoning. This, in practice, forces a very healthy intellectual exercise for managers, one that is usually postponed: Reexamining the bases on which they operate almost automatically and allowing for the possibility of including other sources or ways of seeing things.
We can take advantage of losing the support from forecasts that form a clear scenario to become better investors. Removing ourselves out of that comfort zone drives us to look more closely at our investor practices, expand our conceptual framework and draw on more information. In short, for professional managers, to provide better customer service in the form of operational efficiency or new products aligned with the socio-economic reality. But also for advisory services; i.e., in this context, private savers have an advantage that is often unknown: They do not need to depend on that scenario forecast, because they already have them as standard. If they are well advised, their own investor profile serves as the guide to their investments, regardless of the economic context and emotional swings. Something as simple as reminding them of this and helping them maintain discipline can also help advisors add more value.