The chief investment officer of Magellan says investors face having “their shirts ripped off” by a number of risks lurking behind the rosy picture of a speedy global recovery.
Mr Douglass warned that questions remain about the efficacy of vaccines against potential mutant strains of COVID-19 and that those investors are getting on the bull market bandwagon without considering the risks.
“There is no margin for error in markets at the moment…The risk is foreseeable, and there’s enough evidence to tell you it’s foreseeable and there are some clear warning signs at the moment,” Mr Douglass said, noting that the risks presented by the economic recovery are already complex enough without adding on mutation risks and “clear speculative frenzies” around certain assets.
“This is a really difficult issue to deal with. At one point you want to have risk on because of the stimulus and the economic recovery holding up, but there are other warning signs that you could have your shirts ripped off if something goes against you.”
Mr Douglass has faced questions recently about the performance of Magellan’s global equity strategy, and while he conceded that some of its holdings – including utilities – had “dramatically underperformed the market” amid a rotation out of defensive assets, he defended the more restrained approach.
“We’re cautious and we’re choosing where we want to have our bets at the moment. If that causes some underperformance versus the market in the short-term, my view is: it’s not our money…at the moment the data and the facts tell us to have a bit of caution. If the data and facts change, we will change,” he said.
Mr Douglass also warned that a powerful economic recovery could produce a further rise in bond yields and an acceleration in inflation in the back end of 2021 that is either transitory or permanent.
“If it is the new inflation coming, the Federal Reserve at some point is going to have to change course and start lifting interest rates. That is a disaster for financial markets…if you raise interest rates abruptly to head off a real inflation threat, hold on to your chairs,” Mr Douglass said, adding that while the situation was unlikely, a monetary policy-induced inflation was not out of the question.
“The very long-term – is all this printing of money going to lead to a new paradigm and monetary induced inflation in the world? That is a great question that I do not know the answer to…it is very foggy out there.”