15 September 2020
GAM’s Rahul Mathur discusses his background in fixed income and shares his thoughts on currency and Covid-19’s effects on the global economy.
A pandemic portfolio
There has been one question on every investor’s mind over the past six months: how can my portfolio succeed during the Covid-19 crisis? Rahul Mathur, Investment Manager on GAM's Global Rates and Currency team, addresses this with a reminder that there are no real ‘winners’ in a pandemic. He elaborates, “To varying degrees, all economies have been adversely impacted by the shutdowns associated with Covid. The impact is not equally distributed because there are parts of the world that have health care systems that are far more fragile than ours or China’s or Europe’s or in the US. When fragile healthcare systems have extraordinary new demands put on them, there’s an enormous risk those health systems will collapse. Specifically, this can occur in less developed regions and where there is civil disorder or war.”
While avoiding the term ‘winner,’ Rahul observes that the economies which seem to have been able to weather the storm best have tended to be those in which lockdowns have been the least restrictive, where the monetary and fiscal policy response has been proactive, and also those economies which are least reliant on services versus goods industries. He says, “With the benefit of data, we can now say that Sweden is beating many European countries in the fight against new Covid infections, possibly because of its decision not to impose mandatory lockdown measures.” . The infection rate in Sweden is continuing to fall, even as a second wave sweeps across Europe. The European Centre for Disease Control and Prevention has found that the infection rate in France is more than 60% higher than that of Sweden, despite France imposing a strict lockdown in the spring.
International tourism has come to a near halt in most emerging market (EM) countries. For countries like Thailand, which have sizable tourism-dependent receipts, there has been a sharp decline in tourist arrivals, with the decline approaching 100% in some cases. The International Monetary Fund estimates that a decrease in tourism due to Covid-19 could reduce Thailand’s overall exports by 8% of GDP and have a direct impact of about 6% of GDP on its current account balance in 2020. This could easily erode some of the 7% overall current account surplus the economy enjoyed in 2019.
In contrast, countries such as the UK, South Africa, Brazil, Chile and India have all seen a much less severe decline in exports compared to their reduction in imports. These countries have also had some of the worst virus numbers relative to their peer groups. The improvement (reduction) in imports could be seen as a function of the stringency of lockdown. Here, the outperformance on international trade has come at the expense of more stringent lockdowns, which have depressed demand across the economy.
Rahul’s asset class requires a constant awareness of international market events, as opposed to specialising in a single area of the world. He traces his personal interest in the global economy back to the 1991 UK recession. Having grown up in the UK, Rahul witnessed first-hand the London property boom of the 1980s, followed swiftly by GDP recording its sharpest drop in 10 years at the end of 1990. Inflation hit double figures, and interest rates were as high as 15%. Rahul recalls the human impact as being starkly visible, both on the news and the personal impact on friends and family, as people lost their homes and businesses. Bankruptcies were rising, repossessions were mounting and it was a common sight to see dole queues lengthening. The experience drove home to him how central the economy is to our standard of living, our wellbeing and our prospects. He understood that the economy and economic policy are not an amorphous side show, but rather are intrinsic to the opportunities available to all of us. This is coming into even greater focus today, as we pay closer attention to sustainable growth and policymaking.
After reading Economics at Cambridge, Rahul went on to work as a global macro analyst for an Italian asset management company, where he worked for a group of former partners from Lehman Brothers. In Rahul’s words, in a world of opaque financial instruments and intentionally complex investment strategies, what drew him to GAM was the clarity and integrity of Adrian’s vision (Adrian Owens, Investment Director, Global Macro & Currency Fixed Income). He feels that Adrian’s objective has always been to empower clients with a clear, transparent approach that focuses on generating an uncorrelated stream of alpha. “The depth and quality of the relationships that we have with clients is really a testament to those values – original economic research, pragmatism, simplicity and flexibility in investing, accountability, integrated risk management, respect for sustainable growth, transparency, liquidity and unflinchingly operating in clients’ best interests. I have seen that again and again from Adrian over the years, and, in spite of a whole host of pressures, Adrian’s values have remained steadfast.”
The currency of investing
In his first role, Rahul looked at sovereign fixed income and currency, both areas that he continues to focus on. He highlights his interest in currency opportunities in Scandinavia, where economies have held up exceptionally well throughout the pandemic. Sweden, as mentioned, and Norway are demonstrating robust recoveries in comparison to other developed markets.
Conversely, Rahul believes that signs are currently pointing to a weaker US dollar. This is a reflection of the shift in policy from the Federal Reserve (Fed) to debase the currency as a consequence of the enhanced forward guidance that has been provided. Specifically, at the end of August, the Fed adopted a policy of flexible average inflation targeting, indicating it would permit an overshoot of inflation. That essentially means interest rates will be kept much lower for longer, in order to enable that inflation overshoot to materialise. That decision was expected by the market; what was less expected was the Fed’s shift in approach to the labour market. The Fed is now emphasising a greater sensitivity to economic slack, reinforcing the message that inflation will be allowed to overshoot. The policy of keeping nominal interest rates depressed for an extended period of time has eroded the dollar’s attractiveness versus other currencies, such as the euro.
In addition to a declining dollar, Rahul feels that a number of trends have started to play out as we adjust to the new normal of the pandemic. Aside from the weakening dollar, these trends include an increase in inflation breakevens, steeper curves and continued support for precious metals. On an even more thematic level, he lists deglobalisation, the return of national champions and a substantial increase in sovereign debt levels in response to very aggressive fiscal accommodation.
An uncertain world
Invariably, the conversation turns to the past, present and future of the pandemic. Rahul observes that while the timing is always difficult to pinpoint, there have been a number of leading scientists and public health agencies who have been warning of the risks of global pandemics for several years. Two leading voices who stand out to him are Dennis Carroll of the Global Virome Project and Vaclav Smil, who wrote Global Catastophes and Trends. In the last 20 years alone, we have seen SARS, Swine Flu, MERS, Ebola and now Covid,” says Rahul. “One of the primary causes of these pandemics is, very simply, rapid population growth in an increasingly interconnected world and greater human infringement on natural ecosystems. This is particularly important in the proliferation of zoonotic diseases, such as Ebola, Avian flu and Covid.” He continues, “For example, Ebola was sourced back to a species of bat in West Africa, where we see human incursion prompted by oil and mineral extraction in areas that typically had low human populations. Because of this, the likelihood of another pandemic in the next 10 or 20 years is virtually 100%, but quantifying the severity of the event remains a matter of speculation, because we do not know how pathogenic a new virus will be and what characteristics or profiles it will preferentially attack.”
For now, Rahul has been working from home in Sussex, where he enjoys spending time with his family, running with his dogs and being outdoors. In the future, he hopes to resume his frequent travels to India, to catch up with his friends and family, enjoy the food and indulge in the vast array of experiences that India has to offer.
In line with his personal experiences with diversity, Rahul states that, for him, diversity “is about listening to and respecting different points of view, and acknowledging that none of us, individually, may have all the answers.” He feels that one of the biggest pitfalls our industry repeatedly finds itself in is consensus thinking, whether it relates to how to run a business or themes in an investment portfolio. He says, “We have seen the damage that consensus thinking wrought in the global financial crisis and in each crisis since.” He aspires to what Dr Martin Luther King described as judging people by the content of their character. “Intellectual humility, hard work and openness to different perspectives all allow us to deliver the best possible service to clients.”
During his years in asset management, Rahul has found the industry to be both diverse and inclusive. “A lot is rightly done to encourage positive action and to raise awareness to groups who might not otherwise be aware of a career in financial services. For all the vitriol thrown at the financial services industry, one of the big strengths of this industry is the focus on meritocracy and accountability. It attracts entrepreneurial self-starters and rewards them for what they can achieve.”
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.