InFocus: Global Macro 2.0

Why current low risk appetite is misplaced

Why current low risk appetite is misplaced

The overwhelming majority of Canadian portfolios have a “global deficiency” – an investment stance accentuated by lingering financial crisis PTSD.

The December sell-off tapped into this risk aversion as feelings flooded back from those dark days in 2008 and 2009. But Tyler Mordy, president and CIO of Forstrong Global, believes his team can offer a “global supplement” to ease people’s recovery from the painful shock that still emanates 10 years on.

Despite the multi-year rally that followed 2008's downturn, Mordy told WP that people’s appetite for risk remains stubbornly low, something that has deep roots in the financial crisis.

He said: “What we’ve learned since 2009 is that when folks go through a financial crisis, and it’s that painful from a financial and emotional perspective, that experience is so acute it remains in the brain for a long time. Investors have been carrying around scar tissue and remain hostage to those memories.

“When we experience episodes like that – and it’s behavioural psychology 101 – we then tend to overestimate the probability of that same thing happening again and underestimate the probability of new scenarios.”

Given how the crisis affected people, Mordy said the expectations now are that we’re perennially balancing on “a ledge of calamity” and that it’s only a matter of time before we fall into the abyss.

This is where Forstrong takes a different view. Mordy said: “History would say that when a country goes through a financial crisis, the financial system becomes very conservative, very regulated and risk appetite can take up to a generation to return.

“What we’ve seen in the post-crisis landscape is that it’s conforming exactly to what history taught us; that it’s taking a long time for this risk-averse investor behaviour to fade. This latest episode of December’s dramatic sell-off was just another reminder and it triggered those feelings of 2008 and created more risk aversion.”

Forstrong was the first to deliver a globally balanced, actively managed ETF-only portfolio and can boast an investment team that possesses subject, and geographic, expertise. Mordy is a renowned China bull and proponent of emerging markets, and he told WP that Forstrong’s core portfolios start with 50% exposure to Canada and 50% global before making tactical decisions.

However, he admitted that, with risk appetite down, investors are more reluctant to cross borders and invest in countries outside their comfort zone.

He said: “One of the dominant lessons from a financial crisis is that the senior currency and senior economy tends to stay chronically strong – and in this case it’s the US. It's still perceived as the safest house, although that narrative is fraying at the edges. But people like to own what they know and this is just another extension of this lower-risk appetite.

“But here we are, ten years after the financial crisis and unfortunately the senior economy and currency is extremely expensive. The US stock market is the most expensive stock market in the world and that’s just a function of people bidding up to a perceived safety.”

Mordy, therefore, tells clients and prospects to focus on the future rather than making decisions through the rear view mirror. While the latter is an easier sell for money managers and advisors, it’s not necessarily the answer.

He added: “Here we have the wider emerging markets stocks and assets trading at a hefty discount to the US and developed market peers – and very few want in. Yet this is where global growth will overwhelmingly come from in the next few decades.

“Our argument is that there’s a massive deficiency in the average Canadian investor’s portfolio and we can happily meet that deficiency by providing a global supplement.”

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Founded in 2001, Forstrong Global Asset Management Inc. manages money on behalf of individuals, financial professionals and institutions. Our multi-asset global macro thematic approach has demonstrated the ability to safely steward client assets through challenging markets and economic environments. Forstrong is part of the Industrial Alliance Insurance and Financial Services Inc. (TSE: IAG) family of wealth management companies, which together serve over $100B in client assets.