TOL - 27th Dec, 2024
The Future Fund likens the current era to the 1930s. Where is the best place to hide?
If history is a guide, you should consider increasing your exposure to global equities
Raphael Arndt, CEO of the Australia’s $200bn Future Fund recently penned a thought-provoking piece in the Weekend AFR, stating that the current era “looks much more like the world of the 1930s than recent decades”.
The parallels are undeniable: resurgent inflation, simmering nationalism, and a fracturing of the rules-based order that has underpinned the prosperity of the last fifty years. The Russian invasion of Ukraine, the Israel-Palestinian conflict, and the ominous drum beat of war between China and Taiwan certainly add weight to the comparison.
If this is the diagnosis, then what is the prescription?
How can we as investors best protect our wealth in such an uncertain world?
While history does not repeat, it certainly does rhyme. In that spirit we have analysed the performance of different asset classes during a range of historical wars.
We use the S&P 500 as our proxy for equities, US 10-year bonds for fixed income, and Gold for our safe-haven asset. Our analysis covers the period 1871 to 2025.
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Gold
Gold, perhaps unsurprisingly, dominates with an average return of 14.2% p.a. in wartime periods vs. a paltry 3.0% p.a. over all periods.
Equities
Equities have done remarkably well during wars, returning an average of 11.2% p.a. vs. 9.2% overall. Armed conflicts are generally accompanied by massive fiscal deficits, increases in government debt, and an activation of the industrial-military complex, so it is not that surprising that equities do well.
Government Bonds
Government bonds, often described as risk free, do less well.
Arndt speaks to the importance of liquidity and flexibility in times of geopolitical stress – Gold and Equities certainly tick those boxes.
A limitation of the analysis above of course is that just as history is written by the victors i.e. our analysis is through the lens of the US… German equity investors fared decidedly less well in the world wars.
And the above analysis is for a US dollar investor.
Because the US behaves as a safe-haven, the US dollar tends to appreciate in times of uncertainty. This means that for an Australian investor in US equities, losses tend to be cushioned by a strengthening US dollar.
The below chart shows that in the worst 10% of S&P 500 monthly declines (since 1984), the US dollar appreciated on average 2.90% vs. the Australian dollar.
In the worst 5% of S&P 500 declines, the US dollar appreciated 3.86%. This bolsters the argument further for US equities in times of geopolitical uncertainty.
What about buying puts?
An often-suggested solution to macro and geopolitical uncertainty is to simply buy index puts.
Unless you have a crystal ball and know with a degree of precision when volatility is going to spike, buying protection in this way is unwise.
Below we show the performance of holding the S&P 500 index along with index puts of varying moneyness.
Over the long term protective puts are just too costly and you will lag the unhedged index significantly.
The Australia - China connection
A final argument for international equities vis-à-vis domestic equities if geopolitical tensions were to flare is the reliance of Australia on China for export revenue.
China makes up a third of Australia’s exports. Presumably if China were to invade Taiwan, a trade embargo would ensue, and the the Australian economy would suffer.
Let’s hope that does not come to pass!
An all-weather global equites solution
Dr David Allen is the portfolio manager of The Plato Global Alpha Fund, an all-weather long/short global equities strategy. Plato manages over $15 billion on behalf of large institutions, financial advisers and their clients, HNW investors, SMSFs, and retail investors.
More about the Fund its performance, and its portfolio can be found here.
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David has more than two decades’ experience investing in global equities. Prior to joining Plato Investment Management he worked for JP Morgan Asset Management in London for fifteen years becoming one of the youngest managing directors in the firm’s history. He managed the JP Morgan Europe Equity Plus active-extension fund which was closed to new investors after growing to €6 billion, generating 4% p.a. net alpha over ten years. He also launched and managed the JP Morgan Europe Equity Absolute Alpha Market Neutral fund. In its first twelve months of operation, the fund returned over 20%, and grew assets to €1 bn. In 2014 he was the European Hedge Fund Manager of the Year (UCITS).
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This communication is prepared by Plato Investment Management Limited (‘Plato’) (ABN 77 120 730 136, AFSL 504616) as the investment manager of the Plato Global Net Zero Hedge Fund (ARSN 654 914 048) (‘the Fund’). Pinnacle Fund Services Limited (‘PFSL’) (ABN 29 082 494 362, AFSL 238371) is the product issuer of the Fund. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) (ABN 22 100 325 184). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.
Link to the Product Disclosure Statement: https://plato.com.au/wp-content/uploads/Plato-Global-Net-Zero-Hedge-Fund-PDS.pdf
Link to the Target Market Determination: https://plato.com.au/wp-content/uploads/Plato-Global-Net-Zero-Hedge-Fund-TMD.pdf
For historic TMD’s please contact Pinnacle client service Phone 1300 010 311 or Email service@pinnacleinvestment.com
This communication is for general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance.
Whilst Plato, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Plato, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication.
Any opinions and forecasts reflect the judgment and assumptions of Plato and its representatives on the basis of information available as at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future.
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David has more than two decades’ experience investing in global equities. Prior to joining Plato Investment Management he worked for JP Morgan Asset Management in London for fifteen years becoming one of the youngest managing directors in the...
Expertise
David has more than two decades’ experience investing in global equities. Prior to joining Plato Investment Management he worked for JP Morgan Asset Management in London for fifteen years becoming one of the youngest managing directors in the...
Expertise
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