One week / one topic: Canary in the coal mine

What happened?

On multiple levels, investors are being asked the same question: harbingers of doom, or just noise?

Escalation around Iran keeps dominating the macro backdrop. Are there any feasible off-ramps for this increasingly asymmetric conflict?

Credit markets look more and more stressed, with multiple private credit funds gating, rising redemptions pressure and widening spreads.

The breakneck pace of AI innovation keeps challenging long-held assumptions about the terminal value of ever more assets – including the ‘picks and shovels’ providers.

And yet, and yet… Global growth remains strong, private-sector balance sheets are healthy, and corporate earnings keep growing.

These hardly sound like the conditions for a bear market or a systemic collapse, or have we just become inured to conflict and disruption?

And if so, is it enough to be a self-fulfilling prophecy, where investors don’t panic and therefore assets don’t reprice lower?

Our observations

• Fundamentals: As mentioned before – and especially at times of objective disruption on many levels – risk appetite trumps anything else.

  If there are no atheists in foxholes, rest assured that no one is discounting cashflows as they watch their books crash.

• Price action: If asked to opine on the market’s reaction purely based on the headlines of the last two weeks, I would mostly take issue with government bonds.

  Yes, ever-higher debt levels and inflation scar tissue matter as a starting point… but what happened to ‘portfolio insurance’ assumptions?

• Investor beliefs: With concerning headlines currently dominating news coverage, it’s fair to assume that investors have cut their risk exposures.

  While fundamentals remain somewhat concerning, sentiment at current levels might provide some cushioning vs further downside.

So what?

To have any hope of success in this business, first you need to develop an edge. (not easy)

Then, you need to stick to it – which is possibly even harder, given the ever-changing set of numbers and stories clamoring for our attention.

Playing headline bingo – and especially so in the Age of Misinformation – is not our edge.

With that in mind, we retain a balanced allocation across all main asset classes – while being slightly less constructive than ‘usual’ on developed market government bonds.

Ceteris paribus, higher volatility potentially sets the stage for narrative dominance and overdone investor reactions.

While we don’t see any glaring opportunities yet on that front – i.e. no panic or euphoria – that time might well soon come.

Mood music: Radiohead – Idioteque

By popular demand, here is the One week / One topic playlist