Markets with Bertie: ‘Geopolitical risk’ is to fund managers what ‘world peace’ is to Miss India contestants

What ‘world peace’ is to Miss India contestants, ‘geopolitical risk’ is to fund managers – a cliched answer that they spout when faced with the inevitable ‘What is the risk?’ question. Bertie, too, has often used this platitude and when his client recently asked him the oft-repeated risk question, he unfurled the usual answer. “Really, Bertie?” the client asked. Bertie is accustomed to a sage nod of heads after the mention of geopolitical risk so this deviation from script surprised him. He waited for the client to continue.

“There are two wars on right now; in Ukraine and the Middle East. Neither is showing signs of ending soon. Yet oil is below $75, and the S&P 500 and Nifty are at all-time highs. Is geopolitics really a risk?” This stumped Bertie. The mainstay bullet point on his risks slide was under unprecedented attack. He mumbled something about strong flows and AI and rate cuts – his fallbacks if ‘world peace’ ever failed, but the client remained sceptical. It was clear to Bertie that after many years, ‘geopolitical risk’ was going to have to make a quiet exit from his slide deck. Bertie also made a mental note of telling his salespeople not to sell the fund to too many smart clients.

When growth ends

Ever since the bubble burst in late 2021, investing in China has been frustrating. Investing in that market, Bertie has often felt like an anti-Midas. Anything that he has touched there has promptly bombed out. And that’s not for want of trying. He has tried several investing approaches – looking for fast growth in renewable energy supply chain and biotech, contrarian punts in property, and hope for stability in consumer staples – but none of it has worked.

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After seeing one of the consumer internet names getting pulped, a morose Bertie decided to seek advice from an old friend in Hong Kong. The gentleman had now retired but was one of the few people who had made out like a bandit in the rah-rah days of the Shanghai Composite. “Chinese growth is over for now, Bertie,” he said. “Yes, you will find a few companies that are growing fast right now but you will never feel confident that they will keep growing that way. It’s not like India.”

“So, what do I do?” a dejected Bertie could hear himself pleading. “Back to basics, my boy,” replied the sage. “When things are ex-growth, look for yield. Dividends and buybacks. Especially since Chinese bonds offer next to nothing.” Bertie has now deleted all his growth screens for Chinese names and replaced them with yield filters.

Asset allocation

Bertie rarely reads personal finance columns, except in his favourite newspaper. Even there, he especially likes reading about the asset allocation of financially smart people – fund managers, investment bankers and wealth advisers. When he met his long-time friend Ron, who was associated with the paper in question, Bertie complemented the feature.

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“I like it too” Ron agreed. “But you know what’s interesting about the asset allocation of the smart people? The amount they allocate to equities.” Bertie did not understand, and it showed on his face. “All of them have at least 60-70% in equities,” Ron continued

“Ya. But why is that interesting, Ron?” Bertie asked, still trying to fully grasp what Ron was saying. “It is the exact opposite of what the average Indian household has. About 60-70% of their wealth is in fixed deposits and real estate and that is probably a mistake.”

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Ron was on a roll now. “Over the past 25 years, if you have managed to beat inflation in India, you probably had a large chunk of your savings in equity. And the average household has gotten that wrong.”

Bertie checked the numbers once he got back to office, and Ron was indeed right. Whether past performance can be extrapolated to the future is always a billion-dollar question, but Bertie for one has decided to up his equity allocation some more.