Investment conclusions from Arun Motianey’s SuperCycles

Posted on 31 July 2010 with 1 comment from readers

Required reading this summer for investors not wanting to be lured into conventional thinking is the new ‘SuperCycles’ book from former Citi economist Arun Motianey. This is a fresh analysis of economic, business and investment cycles.

It puts us currently back somewhere in the mid-70s – deflation about to shift into inflation – with a few adjustments. The investment conclusions are therefore similar to what you should have done in the 70s when equities and bonds performed very badly, and cash, gold and oil were king.

Investment implications

First, use the eventual increase in bond yields as a buying opportunity. Those who bought bonds at 15 per cent in 1981 made a brilliant investment, but clearly you will have to wait for this. Bond yields are presently at an all-time low.

Secondly, avoid diversification and focus on those assets likely to benefit from inflation such as energy and industrial goods, or healthcare, and underweight consumer goods. This seems logical as prices are falling at the moment in some areas of the economy like hotel bills and meals out, and this is hardly beneficial for these sectors if general inflation increases.

Third, dividend-only investment instruments will out perform complete equity exposure. That could be a twist on the previous recommendation.

Fourth, include index-linked securities, something that barely existed in the 70s. This is a new investment ploy but can governments be relied upon to correctly index-link for inflation?

Fifth, buy gold, ‘the riskiest (investment) but the gains are potentially the greatest’ says Mr Motianey. He notes the collapse in the gold price in 1980 and warns against too high an exposure because of volatility. Oil was far less volatile, he sagely advises.

Silver and emerging markets?

ArabianMoney would add silver as a final option for maximum leverage to inflation but the same caveat of volatility applies. It worked in the late 70s and the silver market has been desperately bombed out ever since.

Then we would also consider diversifying into emerging market equities likely to benefit from higher energy prices. For example: stocks in the UAE and Saudi Arabia (both very depressed markets), Russian equities, and Brazilian and Chinese oil stocks.

But Mr Motianey’s SuperCycle analysis is well worth a read. For if you can get the overall macro picture right then stock picking is very easy and pretty irrelevant. You can also use a buy and hold strategy rather than the perilous market timing approach because the trend will be your friend.

His broad conclusions are very similar to those propounded by alternative investment experts like the Agora Financial newsletter writers and Marc Faber whose opinions are becoming dangerously close to a consensus view these days. But then that may be simply because they are right!