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It is hard to know what is going to happen. While people like to hear a single view about the outlook for the global economy, with plenty of point forecasts for key variables like growth and inflation, the future is in fact best expressed as a range of possible outcomes; see my colleague Lorenzo La Posta’s blog from two week’s ago (“Embracing Uncertainty”) for a good explanation of what this looks like in practice.

If something is hard, most of us would like to opt out. One way to do this is by investing in secular growth stories: no matter which way the wind is blowing for the wider economy, these businesses continue to do well as they take market share from other areas and come to account for a growing proportion of spending.

Spotting dangers and threats can be a difficult skill; not least because they often hide in plain sight. The physical act of literally seeing a danger can require a deliberate act of searching it out. For example an object such as a car or aircraft you are on a collision course with is often masked by the fact that the relative angle between you is constant, thereby it appears stationary. If the eye does not detect an angular change then it can be literally blind to it until the final moments before impact when its relative size in your field of view blooms to a large size, at which point evasive action can be too late. It is due to this optical phenomenon that to spot the danger we need to move our head around in our scan to create an angular change for the eye to spot.

Today, uncertainty takes many forms. It revolves around inflation, supply chains, energy prices, interest rates, wages, growth and more. Is the current bout of inflation more than transitory, or will inflation indicators turn down towards the widely used 2% target any time soon? When will disruptions to global trade end? Will labour
shortages and raw material supplies come back to normal? Is there such a thing as ‘normal’ anymore, or are we heading towards a ‘new normal’?

A commonly accepted definition for market efficiency is “the degree to which market prices reflect all available, relevant information”. Given the speed with which news is now disseminated around the world, along with the rapid growth in algorithmic trading, one might expect markets to be reasonably efficient.

I am going to introduce a new concept that we take advantage of called, “diversity of time horizons”, a phrase coined by Lyrical Asset Management; and also outline some examples that demonstrate how irrational investors can be at times and the extent to which time horizons can diverge.