By Ven Ram, Bloomberg Markets Live Cross-asset strategist and commentator
What do you see if you manage a fund comprising not ninety stocks, not 900, but some 9,000 of them totaling $1.3 trillion?
Well, for that kind of mammoth portfolio, you get to see the lay of the land perhaps like no one else can. So when the world’s biggest sovereign wealth fund cautions that the “we are going to see more rough weather,” it pays to listen. Norges Bank Investment Management -- better known as Norway’s wealth fund -- saw returns of about $176 billion last year, a number that dwarfs the entire corpus of many funds.
Navigating the post-financial crisis world for many investors, including Norway’s wealth fund, was simple -- not to say it was easy by any stretch -- provided they had a clear vision. Compounded annually, the S&P 500 returned an astounding 16% and the Nasdaq 100 an incredible 23% from the end of 2008 through the end of last year if someone had the courage to go against conviction back then. If rates climb back to anything that could be called “normal” -- and that definition has undergone a regime shift -- returns over the next decade are unlikely to be anywhere near those levels.
Of course, just because Fed Chair Jerome Powell has waved the red flag of rising rates doesn’t mean we will get there in a trice. The road ahead is likely to be punctuated with plenty of surprises, but if the economy were to hold its poise and if Unknown Unknowns permit, we may get to a higher land on rates.
If we get there, the lofty valuations of the go-go days of recent years are certainly likely to be questioned. If, however, the terrain gets rocky and we don’t quite get to materially higher rates, investors may still hesitate to keep buying more and ever more of the same at ridiculous prices.
All told, what we have seen so far this year in stocks is likely to be a recurring headache, which means that it’s time to shun beta and search for your own alpha.
Nothing in this world is permanent except death and taxes, so it’s better to fasten your seat belt and prepare for bumps along the way. Even if the ride isn’t going to be intoxicating, it promises to be exhilarating -- if you are positioned right. If not, the lessons you learn will be.