Fan Yu
FAN YU is an expert in finance and economics and has contributed analyses on China’s economy since 2015.
Follow the ‘Smart Money’?
Amid stagflation fears, cash is the best investment, fund managers say
MICHAEL M. SANTIAGO/GETTY IMAGES
T
he s&p 500 index ended May flat, despite massive volatility in the public markets throughout the month amid increasing angst about slowing economic growth and the risks of runaway inflation. The U.S. economy is on shaky ground. The specter of rising rates, weak consumer sentiment, slowing economic growth, and inflation have severely dampened risk appetite in public and private markets. Asset values have decreased, although the Federal Reserve didn’t begin “quantitative tightening”— planned reduction of its balance sheet—until June 1. So amid all the uncertainty, where should investors turn? Let’s first look at the asset classes where investors shouldn’t turn. Venture capital (VC) investments have witnessed a terrible performance in 2022. Implied valuations of U.S. venture capital investments are down almost 50 percent year-over-year, Morgan Stanley analysts wrote in a May 31 note to clients. This would be the worst year so far for VCs in 20 years. That trails significantly the performance of publicly traded technology stocks, with the Nasdaq 100 index— which is made up of more mature technology companies—down about 22.5 percent year-to-date through May 31, or down 7.4 percent in the past 12 months. What about cryptocurrencies, Web3, the metaverse, and the like? Bitcoin, the biggest crypto by market cap and an asset that is definitionally deflationary, has declined more than 30 percent since Jan. 1. Smaller cryptocurrencies and digital tokens have also followed suit, with the collapse of TerraUSD and its sister token LUNA further shaking investor confidence. In a recent investor survey by Deutsche Bank on what asset classes
So far in 2022, venture capital investments have had their worst performance in 20 years. professional investors most prefer in a sustained inflationary environment, cryptocurrencies came in last in the asset classes quoted, with only 1 percent of respondents favoring them. Early-stage technology firms— crypto or non-crypto—are bracing for a capital drain in the near future. Experts expect VCs, facing worsening portfolio performance, to prioritize using capital to shore up existing investments instead of deploying into new ones. And as less-sophisticated and less-focused VCs exit certain industries (e.g. VCs dabbling in crypto markets may decide to exit altogether), capital will be scarce and some startups will collapse if they mismanage their finances. Of course, this environment is great for contrarian investors to go in and provide rescue capital with highly favorable terms. But this is only suitable for the most risk-tolerant, institutional investors—think Warren Buffet during the 2008 financial crisis. For a peek into how the “smart money” is positioned, Bank of America’s
monthly global fund manager survey results for May are, unsurprisingly, very bearish. Growth optimism was at an all-time low (for the survey) and many fund managers cited stagflation fears. As for the actual investments they prefer, fund managers were most bullish on (in order) cash, health care investments, commodities, energy, and consumer staples. Cash—which loses value in an inflationary environment—is the best “investment,” smart money investors say. They held the most pessimistic views on technology firms, equities in general, the eurozone, and emerging markets. In the Deutsche Bank survey, which was a one-time effort on identifying the best investments to combat a sustained inflationary period, real estate came on top. Property investments (cited by 43 percent) were followed by developed market equities (33 percent), gold (15 percent), and cash (4 percent). The only other asset classes mentioned were developed market corporate bonds, government bonds, and cryptocurrencies. Real estate atop the list is reasonable given its reputation for holding up well in past rate hike cycles. Gold, another hard asset, is traditionally seen as a haven but its price has been flat yearto-date. As for stocks? Opinions are mixed, but one segment has been buying. A recent JPMorgan analysis showed that corporate insiders have routinely bought “the dip” this year. Without them, the U.S. stock market would have suffered even bigger declines this year. Average investors buying stocks should focus on profitable companies in growing industries with low leverage and good management teams. After years of index investing (achieving beta with the market) when the entire market rose, astute fund managers who can pick quality stocks should outperform going forward. I N S I G H T June 10–16, 2022 49
