Why Uncertainty Presents Opportunities

What do April 2025 and June 2022 have in common? Although still to be confirmed, it is likely that they will be the two most recent occasions that global search interest in the term “recession” has risen above the 75^th percentile.

Your friends or families answer might be “who cares?”, telling them that 2022 proved to be the only time since 2004 that peak searches did not coincide with a global recession is unlikely to prolong the conversation, but maybe it should.

2022 was the year inflation returned following Russia’s incursion into Ukraine and Europe faced an energy crisis.  In the end, Germany did enter a technical recession, but Europe remained positive in real terms, the U.S. grew at just under 3% and the world at a little over 3%[1]. 

Will 2025 or 2026 be different?  Of course, offering hope or fear generates clickbait. Saying you don’t know sells nothing. To save you some valuable time - you probably already know that nobody else knows either.  Moreover, the next year or two will pass.

With the relative calm of the 2010 to 2020 decade now in the rear-view mirror, perhaps investors have to adjust to more volatile markets for years to come.  Strategies that worked in the last 15 years might be underperforming while investors adjust their portfolios more frequently. Fundamental analysis becomes more important in times of stress and volatility, in conjunction with stress testing your assumptions.

In terms of our Fund, RGI Global Income and Growth, we tend to forecast five years out, which we know will never be precise. That’s why we build in different scenarios and most importantly, a reasonable Worst Case. In the last five years during Covid and the supply chain upset, we have honed our process to concentrate on a few important metrics when analysing a company:

• Use several scenarios when analysing a business and risks
  • Rather than will tariffs be high or low, instead assess how will the relative competitive positioning change under say three different scenarios for rates? Back the leaders who most likely will be the long-term winners after the dust settles.

• Stress Test the Balance Sheet
  • Look at cash flow, debt repayment schedules and covenants. How much room does management have in the Worst Case?

• Take a long-term view
  • Appreciate we will never call tops or bottoms, but if prices fall, sometimes that provides an opportunity.

• Understand knock-on effects
  • Do the unwinding of trade surpluses and deficits cause new overlooked vulnerabilities in the financial system? Companies with strong balance sheets are in a better position to weather tight financial markets.

• Update frequently
  • The world changes fast and there is no prize for staying the same. What are changes in market prices implying? Adjust assumptions quickly and frequently to remain nimble.

• Learn from the past
  • What have you done in past moments of market euphoria and pessimism? Are you biased to be optimistic?  We had plenty of opportunities over the last five years to learn from uncertainty and hone our investment process to smooth out biases.

Some of these pointers can be found in more detail in Philip Tetlock’s 2016 book “Superforecasting: The Art of Science and Prediction”[2], where the author brings together the findings from different fields that make decisions under uncertainty.

Financial markets amplify uncertainty, make it look like risk and collective stress or euphoria tends to increase the probability of investors making poor decisions. When prices diverge too far from reality and each other, poor decisions can be especially costly for some, but also create outsized future opportunity for others.  It pays to stay nimble rather than putting your head in the sand and waiting for markets to calm down. If like any experienced tradesperson you have a well organised toolbox and expect to be surprised, you can be ready for anything.

N.B. The RGI Global Income and Growth fund has low turnover on average, but because of the above it goes up in times of turbulence. If you would like to learn more about what we are doing and why please get in touch.

[1] Source: Bloomberg

[2] https://www.penguin.co.uk/books/418198/superforecasting-by-philip-tetlock-and-dan-gardner/9781847947154

KEY RISKS

The value of investments and any income generated may go down as well as up in response to general market conditions and the performance of the assets held, and is not guaranteed. An investor may not get back the amount originally invested.

Past performance is not a reliable guide to future results.

Changes in exchange rates may have an adverse effect on the value, price or income of investments.

There is no guarantee that the Fund will meet its stated objectives.

There is a risk that any company providing services such as safe keeping of assets or acting as counterparty to derivatives may become insolvent, which may cause losses to the Fund.

For professional investors only.

Capital at risk.

For more information about the fund and how the fund is positioned, please visit our fund centre below:

For professional investors only.

This article has been prepared by River Global Investors LLP (“RGI”). RGI is authorised and regulated in the United Kingdom by the Financial Conduct Authority (Firm Reference No. 453087) and is registered in England (Company No. OC317647), with its registered office at 30 Coleman Street, London EC2R 5AL.

For further information on the sub-funds of the RGI Funds ICVC, including specific risks and risk profiles please refer to the Prospectuses and the Key Investor Information Documents (KIIDs) (available on river.global).

This article is intended for use by individuals who are familiar with investment terminology. Please contact your financial adviser if you need an explanation of the terms used.

The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a reliable guide to future results. Changes in exchange rates may have an adverse effect on the value, price or income of investments. This article does not constitute an investment recommendation and should not be used as the basis for any investment decision. Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article.