Koda Capital Challenges Consensus And Warns Of ‘Fragile’ Recovery
05 Feb 2021
The $8bn boutique wealth manager Koda Capital says the apparent global economic recovery is “fragile at best” and the firm is not expecting a vaccine rollout, together with supportive government policies, to deliver a quick return to pre-COVID growth levels.
In Koda’s latest quarterly briefing to clients, chief investment officer Brigette Leckie challenges the consensus of many forecasters and central banks that the global economy will be back at pre-COVID levels by the end of the year.
“We see this as the ‘all goes well’ bull case, not our core view,” Ms Leckie wrote.
Despite greater resilience in 2020 to the global pandemic than most forecasters (including ourselves) were expecting, ongoing COVID-19 outbreaks, continued mobility restrictions, outright ‘fear’ and structurally higher unemployment rates will impede recovery even with continued government stimulus.
Aside from the well-documented uncertainties with such a mass-scale vaccine, we are expecting a more gradual economic recovery due to the psychological and biological impacts from the virus.
Her analysis argues that many individuals have significantly altered their decision-making around what activity can be safely and sensibly undertaken to avoid infection and what activities increase the risks of being infected by the virus.
“For many, such behavioural changes, especially in consumer services spending, will have become engrained,” she wrote. “Others will revert back to prior services spending activities but in varying degrees. All in all, more cautious behaviour argues for continued supportive government policy settings in 2021, which is reflected in asset allocation positioning.”
She said the firm planned to make no changes to its overall portfolio positioning, which remains neutral on overall developed market equities and underweight US and core European equities as the valuations are “stretched”.
Koda continues to have an overweight positioning to China and to emerging markets, which benefit from commodity prices, US dollar weakness and lower valuations.
In alternatives, Koda’s portfolios remain mildly underweight in real assets, private equity and venture capital and largely overweight in what it calls “opportunistic assets”.
The average return across all Koda’s strategies (legacy and existing) last year was 8.3 per cent.
“To add risk, we would need both a risk-on environment and favourable asset valuations,” Ms Leckie told clients.
Policy settings are extraordinarily stimulative and as a result we are in a risk-on environment. But valuations are expensive, so that stops us from adding risk. De-risking would require extended valuations and a risk-off environment. The latter would be a change in policy direction, that is, tighter fiscal and/or monetary policy settings.
More than six years ago Paul Heath, a former JBWere executive, teamed up with former MLC boss Steve Tucker to launch Koda, which now advises on $8bn worth of client assets and counts some of the nation’s ultra-rich among its top clients.
Koda works with a very large high-net-worth adviser in US, the New York-based Papamarkou Wellner Asset Management.
Ms Leckie told clients that Koda was confident its portfolios this year could deliver high-single-digit returns across most market scenarios despite elevated valuations across almost all core, traditional asset classes.
“Our approach sees a lower overall weight to domestic equities, but a punchier allocation via active strategies and a bias to small and mid-caps,” she wrote. “This disproportionately contributes to portfolio outcomes, while a smaller overall weight helps to fund other allocations (private debt and alternatives).
“We see no reason to change this approach — active strategies, concentrated to their best ideas, and which work together collectively are the best defences to elevated market valuations.”
Koda’s private debt allocations delivered an average gain of 5.8 per cent in the December quarter, and 6.7 per cent for the year.
“Pleasingly, performance over the COVID-19 period definitively proved the naysayers wrong,’’ Ms Leckie wrote.
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