Senior Managing Director & Global Head of Capital Markets & Factor Investing
Advisor, CPP Investments Insights Institute
Q: What factor poses the greatest risk to markets in 2023?
A: The speed with which inflation reverts toward target and whether a recession ensues before that happens — plus the associated policy actions — are the key risks. But we need to remember that economic conditions are not the same in every region and, hence, central bank policy action can lead to different outcomes and market reactions globally. This is creating both risks and opportunities for our strategies.
Q: How long do you think it’s going to take until we’re no longer thinking of every inflation print as the most important print of all time?
A: Along with everyone else, we are following the inflation story closely, beyond the headline numbers. The observed volatility in market reaction around macro data release days has been higher than we’ve been accustomed to in the post-Great Financial Crisis environment. While this can be complicated to manage in the short-term, it is important to remember that volatility and dispersion are to the benefit of our strategies in the longer term, providing good trading opportunities and the ability to position for non-consensus views. Risk and return potential are two sides of the same coin.
Q: On risk models and looking at other periods in time that you can refer to: How does your team do that for this type of environment?
A: One of the things we are doing very actively, is looking at our risk models right now and saying, ‘What are the appropriate look-back periods we should be looking at? Do we have all different risk factors in there? Do we know which portfolio and which set of strategies will perform well if inflation stays at this level?’
And we also definitely stress test more to the extremes now. Our stress testing and scenario analysis capabilities continue to evolve.
Q: You spoke earlier about how the market is reacting to data. For an investor like CPP Investments that’s focused on the long term, how do you manage through that?
A: You cannot react on a day-to-day basis. Simply put: that’s not who we are. People talk a lot about diversification, but it is so important — and it’s not just diversification by region — it’s diversification by style, by holding periods, by asset class. And then when you put on the CPP Investments lens, there’s another layer of diversification that comes from private equity, real assets, and the list goes on.
Q: What’s it like for you, in your job now, as compared to during quieter macro times?
A: While I’m cognizant of the day-to-day, my focus is more long term. Do I look at the markets? Do I know what is happening? Of course. But that doesn’t mean I’m actively saying, ‘Sell this. Buy that.’ That’s not for me, and that’s because of our long horizon and our mandate.