Home ListingJune 7, 2012

Geopolitics, Liquidity, Solvency: Obstacles and Opportunities for Investors

<em>How should investors position their portfolios for turbulent times? Brian Singer, head of dynamic allocation strategies at Chicago-based William Blair & Company, aims to answer that question. </em>

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(June 7, 2012) — Geopolitics, liquidity, and solvency issues, along with the integration of developed and developing economies are the sources of today’s turbulence and investment opportunities.

This assertion comes from Brian Singer, head of dynamic allocation strategies at Chicago-based William Blair & Company. “This turbulence is not unusual, but it might seem unusual because investors’ experience and training have not prepared them for it,” he writes in a paper.

According to Singer, the turbulence of today’s markets is something investors are not used to, and the source of turbulence is different from what they have experienced. “Over the long term, investors can expect to achieve a 6% real growth rate in US equities…It remains to be seen if this rate is sustainable going forward.” Meanwhile, fixed-income around the world has recently been generally turbulent.

“Investing during turbulent times really means investing in a world of turbulent volatility sources,” Singer says, concluding that the following three sets of capital market drivers will ultimately influence asset prices.

1. New world power order. The world that investors have experienced and the training that they have received are results of a unique environment, according to Singer. “Part of behavioral finance is understanding geopolitics and game theory. Investors do not operate in a world of isolation. Continual analysis to understand the players, their behaviors, and the behaviors that they are trying to elicit is valuable.”

The knowledge base of investing is also expanding. “In an unstable, suboptimal game, a knowledge base for investing that is built only on the fundamentals of security valuation is not as valuable as it used to be. In the past, it was not only necessary but also sufficient for investors to understand the fundamental values of securities. Today, it is still necessary but no longer sufficient in order to be a good investor,” Singer writes.

2. Illiquidity and insolvency. Illiquidity means that an entity cannot meet current cash flows — an issue that is acute and immediate, according to the paper’s author.

3. Global integration and connectedness. “Today, more than 80% of the world’s population is in the developing world, and it has a greater incentive to integrate with the developed world than ever before,” the paper concludes.