Real world crises abound
Despite having spent the first part of my life in crisis management of one sort or another, I cannot easily recall a period when we were presented with quite so many challenges of such variety. Chief amongst these must be the tension between the great powers and the widely felt and increasingly direct effects of climate change.
Great power politics is in a state of stress. The renowned macro hedge fund investor Ray Dalio, of Bridgewater fame, notes that his conflict gauge, which tracks the risk of conflict between the major powers, has surged to a level not seen since the peak of the Cold War[i]. Then, in 1983[ii], the cause was misinterpretation of intent during nuclear exercises by the NATO alliance, mercifully wise heads prevailed. If anything, we are further along now in practical terms, with NATO supplying arms to Ukraine in a kinetic war with Russia, and China conducting mock engagement with Taiwan. So far, wise, or even not so wise heads have prevented wider conflict. Let us hope this continues.
This summer, the climate emergency has compounded the succession of winter storms and floods with severe drought. For some this has life-threatening consequences; for others, livelihoods are at risk. Even in Norway, adverse weather events have exposed the weakness of the present energy policy adopted by successive governments. To a guest like me, this feels like such a missed opportunity given Norway's many advantages. For certain the autumn/winter, with lower temperatures inevitable and Russian gas now weaponised, looks set to be a winter of discontent in many parts of Europe.
For each challenge, there is an opportunity
These external challenges are not new to a fund manager like SKAGEN. They continue to form part of the consideration set of the investment process, and for each challenge there is invariably a corresponding opportunity. The truth is, what we all already know is almost always already priced into the listed value of a company; the challenge is evaluating the probability of what might occur and its likely future impact on the price. When this uncertainty is hard to fathom, the benefits of an under-priced and well-diversified investment portfolio are self-evident.
Taking China-Taiwan as an example, our analysis and our access to both formal and informal networks suggests a more nuanced picture than that described by the mainstream media. Risk assets are not currently priced for a China-Taiwan conflict, so the absolute downside risk remains across the global capital markets. Given relative valuations currently, one could argue that Chinese risk assets reflect a higher probability that something is going wrong, but there are other issues at play also – the pandemic, property market and upcoming congress. Chinese messaging in the Asia-Pacific region has been twofold. The one, complete with missiles and exercises, targets the nationalist netizens and aims to offer a robust stance short of major escalation with the US. The other, through more traditional channels, attempts to steer public opinion to the less radical and more balanced view. All of this reflects the need for and importance of ensuring an undisrupted, scripted, and successful party congress in the autumn.
As it currently stands, SKAGEN's funds are underweight China relative to their respective benchmarks. And there are substantial opportunities in current events. Samsung, a SKAGEN holding, becomes an even more important strategic player in semiconductors. The company is number one in memory already and has less China production reliance than others; and Samsung's foundry business becomes the strategic second supplier for Taiwanese TSMC's clients who will naturally want to diversify. In such analysis, investment horizon is always a critical factor.
Inflation – here to stay?
I spoke of inflation at the end of 2021, then the magnitude and duration were a matter of much speculation. Less so now perhaps. Experience suggests that inflation of the magnitude we now observe does not so quickly abate, although recent and encouraging signs of the resilience of global trade will help to drive down supply-side price pressures. Few in the workforce nowadays have lived through a period of sustained inflation; even fewer of today's politicians have led through such. I began (part-time) paid employment in 1980 – as a farm labourer as it happens – and UK inflation was nearly 18%. It took some time to bring that number down to the targeted 2% and keep it there. And interest rates were well above 10% and stayed there for a similar period. The combination of structural and transitory pressures that are fuelling the current crises are significant, so it is perhaps wise to prepare for a longer haul than some might suggest.
Investing in the client
Against this challenging backdrop, what are we in SKAGEN doing to support our clients and ensure that our portfolios are optimally positioned? After the pandemic confinement, the portfolio managers are taking the time to follow up investments and ideas in person. At the time of writing, there is a portfolio team in Korea assessing both existing and prospective holdings. Indeed, some of the best investment decisions are made during times like this.
From a client perspective, we see that periods of significant challenge generate uncertainty and talking to an advisor can provide guidance as well as reassurance. We have therefore expanded the capacity of our advisory team to reflect the additional demand we expect and wish for. Our advisors have spent the summer updating their market views and are looking forward to discussing the opportunities with you. We also continue to provide our clients with regular updates on the market situation and our funds in the form of newsletters, articles and monthly webinars with our portfolio managers. A post-summer review of one's financial affairs has never been more timely, or necessary.