Читать книгу Risk Parity - Alex Shahidi - Страница 27

Imagine that you own a small private business that develops and sells a product. Would you generally expect sales to improve or decline during an economic collapse like 2008 or the first quarter of 2020? Unless you sell something extremely unique, most would answer that a material economic downturn is probably an unfavorable environment for your business. Likewise, if we are in the middle of a prosperous period and business is booming, you should reasonably expect the value of your venture to increase. What if your expenses unexpectedly spike due to rising inflation and you are unable to fully pass through the increase to your customers? Wouldn't it make sense that the value of your profits would be negatively impacted, and the opposite would be true if your input costs declined?

The stock market works the exact same way and is supported by an identical rationale. A stock represents an ownership stake in a public company. The stock market is simply made up of a large basket of individual stocks and provides a broad representation of public company performance. The main difference between a public stock and your private business is that the former trades on a stock exchange and its value is correspondingly fully transparent on a daily basis. Anyone can transact in a share of the stock, and the market of potential buyers and sellers sets the prevailing price, which is largely based on the knowledge of the public. The consensus ultimately establishes the fair market value of the business according to its perceived value, which, just like your business, is heavily influenced by the economic environment. This is why the stock market plunged 33% in five weeks during the onset of COVID‐19. Investors were justifiably terrified that revenues would fall off a cliff as the economy was shut down. Even though you may not have perceived the value of your private business to have similarly declined because its price is not published every second, you would have likely suffered a similar fate at that time.

If we look deeper into why the value fluctuates based on the economic environment, we see that each business can be viewed as a series of future cash flows. Today's value of the business is based on the market expectation of the value of the stream of cash it will distribute in the future. The distributions are dependent on the revenues of the business as well as its expenses, which together determine the net profit to owners. When investors buy stock, they exchange safe cash for a risky investment in a company because of the expectation of excess returns above cash in the form of future cash flows (to compensate for the risk). The price paid discounts future economic expectations of growth and inflation, since those two factors have a material impact on the stream of cash flows. This connection between shifts in growth and inflation and individual asset‐class performance will be fully described in the following chapters. You will see how each asset class (such as stocks, Treasuries, and commodities) has a different bias to different growth and inflation outcomes.

Of course, a single business's cash flows are more likely to exhibit idiosyncratic factors specific to its revenues and expenses. If your private business provides software solutions and the cause of the economic downturn is a global pandemic, then your revenues could soar, whereas a travel agency may not be as fortunate. However, when we take the entire stock market in aggregate, the unique aspects to each business net out, and the overall economic environment becomes the primary driver of returns.

Importantly, when we refer to rising and falling growth and inflation, we should think of it relative to what was originally discounted. In other words, if the market expects and is priced for 3% growth and we get 1% growth, then that is a negative influence on assets biased to do well when growth is improving, even though the economy grew. Buyers and sellers agreed on a price level that factored in 3% growth and only received 1%. Therefore, the price discounted more growth than actually transpired. Once the knowledge of the lower growth rate gets recognized, then the value of the market declines, all else being equal, to reflect this lower growth. Since current and future expected cash flows are now lower than previously thought, this means, practically, that businesses are now worth less than they used to be, since they are expected to produce lower profits. Prices adjust to reflect this shift. Changes in inflation work the same way.

Shifts in growth and inflation heavily influence the returns of other asset classes as well. Treasuries, for instance, move inversely with interest rates: as rates rise, Treasuries underperform, and they outperform as rates fall. Interest rates are the key tool used by the Federal Reserve (the “Fed”), which is the central bank of the United States; other major economies around the world have their own central banks. The Fed uses interest rates to manage the economy. During weakening growth and/or falling inflation periods, interest rates are reduced, which increases the present value of Treasuries' fixed future cash flows. When growth or inflation rises, the Fed increases interest rates, reducing the value of those future cash flows discounted back to the present at the higher rate. There is a fundamental link between economic shifts and the price of Treasuries, which are biased to do well when the economy weakens and/or inflation is falling. Beyond the impact of Fed tightening/easing, changes in inflation/growth expectations affect asset prices directly. If inflation rises, lenders will demand a higher interest rate to ensure they earn a real return, and borrowers will be eager to borrow at prevailing lower rates knowing they can repay their debts in cash that's worth less tomorrow than it is today. This pushes up the market interest rate to a new equilibrium between borrowers and lenders.

Similarly, if growth is very strong, demand for capital will increase from borrowers eager to build or expand their businesses. Greater demand to borrow also pushes up interest rates, just as rates decline when growth weakens and demand for capital falls.

Treasury Inflation‐Protected Securities (TIPS) are similar to Treasuries in that they are government‐guaranteed bonds and can serve as a safe‐haven asset. They differ from Treasuries in that they are directly linked to inflation, because these securities pay the holder the prevailing inflation rate as measured by the consumer price index (CPI). Therefore, TIPS are biased to outperform in the exact opposite environment of equities – namely, falling growth and rising inflation. They are also a good diversifier versus Treasuries even though TIPS and Treasuries are both government bonds. The latter outperforms during falling inflationary periods and does poorly when inflation rises since it receives a fixed interest rate as opposed to an inflation pass through.

Commodities are another diversifying asset class. We can break commodities down into two subgroups: industrial commodities and gold. Industrial commodities include energy, industrial metals, and agriculture, which are considered good inflation hedges. This is because higher commodity prices are actually one component of general price inflation since they are a key input into many goods and services, and are literally part of the CPI measure. Gold, on the other hand, is more of a currency and a storehold of wealth. Its price is far less influenced by aggregate demand as an input to produce something else. Consequently, the economic bias of industrial commodities is to outperform in rising growth and rising inflation environments whereas gold is more of a falling growth, rising inflation asset. It also serves as a useful diversifier against more extreme growth and inflation environments and periods of crisis. The year 2008 and the first quarter 2020 offer good examples of the divergence: gold rallied in both periods, while industrial commodities collapsed amid the severe economic downturn.

I have devoted a single chapter to each major asset class to provide greater insight into the relationships between the environment and returns, so I won't get into too much detail here. Most important, all the cause‐effect linkages are logical and reliable and can be supported by long‐term data. With an appreciation of how each asset class is biased to perform in various economic environments, we can thoughtfully select the appropriate asset classes to include in our balanced portfolio.