Last week, my colleague John Roe was inspired by a Brothers Grimm fairy tale. That made me think of an old Flemish fable – one I assure you I am not spuriously conjuring – about a bear, a wolf, and a chicken.
It begins with a wolf pack. Why do wolves live in packs? Pack life ensures the care and feeding of the young, allows wolves to defend their common territory, and cooperation helps them to bring down larger prey.
When the pack goes marauding, it is not the alpha wolf who walks at the head of the group. Rather, the first three wolves are the old and the sick; they walk in front to set the pace of the entire pack.
The next five are among the strongest and fiercest; they are tasked with protecting the front of the pack if there is an attack. In the centre are the majority of the pack members, always protected from any attack because behind them are five more strong and fierce wolves to guard the rear.
At the very back of the pack is the alpha wolf, the leader standing alone. He controls everything from his vantage point, making sure no one is left behind. He is always ready to run in any direction to protect the pack, and serves as the bodyguard to the entire group.
That is what it really means to be a leader. It is not about being out in front; it means surveying the entire landscape, spotting opportunities and threats, and taking care of those around you.
Bear with me
Most people would love to be the alpha wolf, of course, but could we actually just be chickens?
After all, our medium-term score for equities moved to neutral in August. It is boring to be neutral, I know, as it almost feels like you don’t have any views. Is it possible we have simply chickened out of making a firmer decision? Fortunately, though, we don’t have a history of being neutral for too long.
Our scenario thinking explains our present neutrality. Our average scenario-weighted one-year ahead expected equity return is -0.8%. This is quite a bit lower than the historical average. We still expect equities to generate a positive return in 65% of the outcomes; ‘positive returns in most cases but a bigger negative tail risk’ is pretty standard in markets. So what’s different this time?
It’s that lurking bear. We believe the probability of the bear case – a global economic slowdown – is now higher than all the other scenarios. This would be a bleak environment for equities. It can also be seen in our economists’ monthly roadmap for September, where they entertain three macro scenarios: a baseline scenario with global economic growth settling around trend rates (with a 30% probability); a downside scenario with sub trend or a global recession (50% probability); and an upside scenario with global growth recovering to above trend rates (20% probability).
Animals that live life in the fast lane and use risky strategies to find food are more likely to become extinct than those that take the safe option. We are therefore choosing to be neutral for now. It’s what the wolf would do.