Wealth Strategies

It's The Liquidity, Stupid – How Macroeconomics Shapes A Portfolio

Tom Burroughes Group Editor 11 August 2022


Whether a market is being shaped by fresh central bank liquidity or by banks taking liquidity out of an economy will shape the broad direction of asset prices. That seems obvious, but what is less obvious is how it forms a driving theme for a portfolio strategy.

Many investment fund managers use a blend of “top-down” themes and “bottom-up” analysis of specific firms to drive returns. It’s unusual to find a manager who is totally on one side or the other.

As investment styles evolve, the themes or “overlays” a manager applies will vary. NS Partners, a boutique equities fund manager that works with Nedgroup Investments, has a specific theme that it spends time on: the liquidity cycle. This relates to whether central banks are pumping money into the economy or taking it out.

Governments in the US, UK, eurozone and other select areas are reversing the monetary expansion that has gone on for more than a decade. (China is still in expansion mode.)

“We look at a country and what its liquidity phase is. If you have excess liquidity, then that is going to wash into markets and you will find a bull market somewhere,” Michael Mortimore, client portfolio manager of the Nedgroup Investments Global Emerging Markets Equity Fund, told WealthBriefing in a call. 

“We have a red-hot global economy but really sharp contraction in money supply in most major markets around the world, apart from China. ”This can help asset allocators decide where to be bullish and where to be bearish,” Mortimore said. 

“Emerging markets are so diverse…there are different countries with different gearing to the liquidity cycle,” he continued. 

One of the benefits of the liquidity mindset is that it injects an element of discipline into stock selection and asset allocation. 

“Having this liquidity approach makes you a bit more self-aware,” Mortimore said.

The fund, founded in April 2019, has $112 million of assets (as of 30 June) and, like much of the market, has been dragged down by falls in global markets. Over one year, it is down 26.5 per cent, broadly matching wider results in the sector. Chinese investments are the largest share of the fund (26 per cent); “other regions” (23.5 per cent); India is in third place (14.6 per cent), and Taiwan in fourth (12.6 per cent). The fund carries an annual management fee of 1.5 per cent. Its largest single holding is Taiwan Semiconductor Manufacturing Company, followed by Alibaba and Tencent.

There are other tendencies that can pull in favour or push against a sector.

Southeast Asia has a positive gearing to rising commodity prices, for example. On the other hand, South Korea is more geared to the shape of the consumer semiconductor cycle, he said. 

“We have favoured things that have been a bit more defensive up until now,” he said. 

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