Generating Alpha by Managing Unquantifiable Risks: Politics, Policy & Geo-Politics

img_5288Speaker: Philippa Malmgren, President and Founder, DRPM Group

Moderated by: Jayesh Gandhi, CFA, President & Director, IAIP 

Contributed by: Chetan Shah, CFA, Secretary & Director, IAIP

Though not reflected in the headline numbers, inflation has inched up, according to Philippa if one goes by what we see around. The products of daily consumption like tooth paste are up if one were to adjust for the size and weight of the packs. Most of the industrial commodity prices are up after sharp dip over last two years. Cost of living of cities like Beijing in China have gone up sharply especially the rentals which now comprise 1.6 times the average wages.  Apartments need to be shared with fellow workers to stay put. It has led to doubling of wages over the last 3 years. The wages in the same geography are expected to grow by another 7-10% in the near term.

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Higher inflation has implication on the interest rates and asset allocation. Already the 25 bps increase in Fed rate has resulted in large losses for bond holders and pension funds in the recent past. The Fed, which waited for inflation to rise over the last three QE programs, and the markets may have to re-look the pace of its rate hikes.

Looking at Brexit and Trump’s victory, both of which Philippa was able to predict correctly, it is clear that the voters are unhappy with the incumbents. The masses have not benefited from globalization. Unemployment rates are running high in most countries in Europe. Governments have spent billions bailing out the financial institutions but done little to improve careers of their youth.

Russia, has been increasing its presence right from the Artic to the Baltics going into the Mediterranean region, as part of its “Arc of Steel” strategy. On the other hand China has been working steadily on “One Belt One Road” strategy both ocean going and land based. Coincidentally, both Russia and China face similar problem for its people – a high proportion of their income going on food items. Both claim to be keeping the interests of their nations in mind while justifying their strategies. Trump thinks that he will be able to negotiate better deals with both of these nations just like former US President George W. Bush (when Philippa was part of the administration). But, looking at the stress being developed between them, it may not be easy. In the meantime QE4 is coming in the form of increased defense spending!

  • CGS

About IAIP

India Association of Investment Professionals (IAIP), which is established April 2005 and located in Mumbai, is an association of local investment professionals. As one of the 136 CFA Institute member societies, IAIP connects members to a global network of investment professionals. Consisting of portfolio managers, security analysts, investment advisors, and other financial professionals, IAIP promotes ethical and professional standards within the investment industry, facilitates the exchange of information and opinions among people within the local investment community and beyond, and works to further the public’s understanding of the CFA designation and investment industry.
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