Investing in Times of UncertaintyBy Omar Larré | Thu, 04/21/2022 - 14:00
This year got off to a turbulent start, and this has been reflected in investments. Stock indexes, such as the NASDAQ-100 (technology companies) or the DAX (German stock exchange), have fallen by more than 20 percent since the beginning of the year, while the S&P 500, the main US index, has fallen by almost 13 percent. Not to mention Hong Kong's Hang Seng, which in the last year showed movements with losses of up to 37 percent. However, in the last few days, these indexes have shown some recovery.
Downturns and turbulence in general have various causes but the main drivers for what is happening today are inflation and Russia's invasion of Ukraine.
Regarding the former, it is quite clear that we will face greater inflationary risks, since the aforementioned conflict affects the rising prices of raw materials, such as oil, food and fertilizers, and, at the same time, "de-globalizes” the world; that is to say, it will encourage global trade to decrease, which is inherently inflationary. The reasonable thing to do then is to prepare portfolios to face more inflation. On the positive side, commodity-producing countries within Latin America, including Mexico, should be less affected, although that does not mean that Mexico will be spared from a potential new wave of inflationary pressures.
Regarding the Russian-Ukrainian war, it is difficult to predict when and how it will end. Vladimir Putin is determined to change the Ukrainian regime but the country has been determined to defend itself (and the Western world to sanction Russia), increasing the risks of a slow, costly, and highly uncertain outcome. Given this situation, choosing very conservative portfolios in case volatility negatively affects the perception of savings or if you are not looking to face risks in the short term makes the most sense, especially with today's high interest rates. Banxico's current target rate of 6.50 percent stands out as a reference and it is also expected to continue increasing during the year (the market suggests it is likely to even surpass 9 percent). Vehicles such as short-term debt investment funds, or simply short-term Cetes, point in the right direction.
The worst-case scenario? A "nuclear apocalypse," as Peter Berezin, strategist at BCA Research, put it. His controversial advice was to keep in mind that the risk of nuclear Armageddon has increased but invest in stocks over a 12-month horizon, since most stock indexes, which are still being punished in terms of price and still have interesting valuations, should rise after the end of the conflict. In other words, in any non-apocalyptic scenario, investing in stocks makes a lot of sense when thinking more than one year into the future and into the long term. Terrible, but true.