Real Assets

Managing Risk Amid Macro Uncertainty

Article

May 12, 2023

The Brookfield Public Securities Group’s portfolio risk and analytics team helps our listed real asset investing teams monitor risk through customized analysis and daily risk reports for each strategy, covering everything from concentration risk by region and industry to historical stress tests of portfolios. We recently sat down with Riley O'Neal, the director of the portfolio risk and analytics team, to discuss how he is helping our portfolio managers play defense and manage risk in today’s uncertain economic environment.

Q. What worries you about markets today?

A. There is a high level of macro uncertainty, with a very large disconnect between credit and equity markets. The MOVE Index, a measure of the implied volatility of interest rates, is near all-time highs, while the VIX, a similar equity market measure, is the lowest it has been in months. The equity market is saying “Don’t worry. We’re going to have a soft landing. We’re all in the clear,” while the credit market is signaling uncertainty about the future path of rates and economic risks such as the debt ceiling and banking system stress. It seems as if there’s some complacency in equity markets, and nobody knows when that is going to turn—and whether the equity market or the credit market is right. And typically the credit market tends to be right.

Q. How are you helping PSG investment teams navigate this uncertainty?

A. We have seen periods in the past that have looked like this, and we try to use those periods to identify what types of risk outperform or underperform. When we have a lot of macro uncertainty, like we do today, we try to encourage the portfolio managers to focus the majority of their risk in idiosyncratic or company-specific storylines. We try to limit exposure to factors that may be driven by macro or market outcomes that are very uncertain and make sure our relative risk is really coming from what we do best—picking stocks and bonds.

Q. What are some examples of factors you try to limit exposure to today?

A. Certain factors tend to underperform in a risk-off market: high beta, low quality and high leverage. High-quality stocks typically outperform because they are viewed as more defensive and stable. This is why our teams are focused on investing in quality companies with healthy balance sheets, strong earnings outlooks and solid cash flows.

We also try to make sure our overall exposure to various industries or regions is not taking unintended bets on the direction of the economy or markets; for instance, that we’re not overweight the most economically sensitive and cyclical sectors or regions. In addition, we seek to limit our exposure to certain themes, such as regional banking issues, and we’re very focused on liquidity. If things turn bad very quickly, you don’t want to be stuck in positions that you can’t exit.

Q. What would make you want to take on more macro or market risk?

A. Until there is more clarity on the direction of rates and the economy, we would much rather our teams focus on company-specific risks, such as upcoming earnings or regulatory events, and on the great opportunities for employing bottom-up, fundamental analysis and active management in an uncertain environment. Read more in the full Real Assets Monthly.

Disclosure Information

This material is not, and is not intended as investment advice, an indication of trading intent or holdings or the prediction of investment performance. All information is current as of the date of this material. Views and information expressed herein are subject to change at any time. Brookfield Public Securities Group LLC disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources however, Brookfield Public Securities Group LLC does not warrant its completeness or accuracy. This presentation is not intended to, and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service (nor shall any security, product, investment advice or service be offered or sold) in any jurisdiction in which Brookfield Public Securities Group LLC is not licensed to conduct business, and/or an offer, solicitation, purchase or sale would be unavailable or unlawful. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.