Global Markets Update
Over the past month, we have written about our views on the various commodities sectors where we have seen opportunities to focus on given the current environment. We concluded that with both global equities and fixed income falling from the start of the year, the traditional 60/40 balanced portfolio is not performing as one would expect. We also concluded that some exposure to commodities is an important part of the overall portfolio balancing process and a good manager would increase and decrease allocations opportunistically. While geopolitical events have provided some interesting discussion points with respect to commodities, we also thought we would provide our thoughts about the current major events given that so much has changed over the course of the last month.
- Russia and Ukraine: The geopolitical conflict between these two nations will most likely degrade into a long-term struggle. The multiple risk factors here impact commodities because of the physical conflict (i.e. wheat) and because of strategic measures (i.e. Natural Gas) could well push Europe into a severe recession. There is also risk that the conflict could expand to other nations. This would result in a very severe market reaction.
- China Growth: While the conflict above takes most of news volume, China is in the midst of a COVID crisis that has resulted in substantial mitigation measures from the government. This has resulted in significant impact to the growth prospects in China and consequently global supply chains are further suffering. We view this as the major risk to our investment thesis. It might not right itself until the fall and even resulted in government reaction today to help stimulate equities.
- Inflation: The global financial system was already dealing with an inflation problem before the two major events above were added to the mix. Now, central banks are struggling with the difficult decision of increasing rates to fight inflation while, at the same time, potentially dealing with economies that may need stimulative support due to the slowing growth profile from the war and COVID issues identified above.
“This means that” the traditional 60/40 portfolio noted above continues to have difficulty. The two major asset classes (equities and bonds) have further accelerated to the downside. We added the US Trade Weighted dollar index to Figure 1 so that you can see the magnitude of the drop. Over the past couple of months, we have taken the opportunity to add to our stock positions where we have strong conviction and can find good value. We still have some cash on the sidelines that we will look to deploy as opportunities further present themselves.
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*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
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