Where to invest when you don’t know what’s coming next

Considering what’s happening around the world, from Brexit to the US-China trade war, markets are showing less volatility than expected. And this makes Bruno Paulson, Portfolio Manager at Morgan Stanley Investment Management nervous.

“The markets are not reflecting the volatility of the world. And that makes me nervous about the market as a whole and tells me that it’s probably a decent idea to get into the companies that aren’t volatile, even when the world does get volatile.”

Bruno and team manage Morgan Stanley’s Global Franchise strategy, which during downturns has shown a strong history of margin stability and lower long-term volatility than the broader market. 

In this short video, he explains if you don’t know what’s going to happen in the market, then you should own companies where it doesn’t matter what happens.

Edited transcript

The first thing is, I don't know what's going to happen next. And the whole point about the way we invest is we don't need to know what happens next. If you're investing in a low-quality cyclical company, you've got to get the timing right because the earnings could shoot up or they could collapse.

If we’re investing in an incredibly high-quality company, you just hold it and own it. Unless there’s something simply gone wrong; you’re not trying to time it. My qualification is that this is not our area of expertise, which is why we invest the way we do. But given that, I'll attempt to answer your question. [What is your assessment on how exuberant markets are right now?] We live in a very, very volatile world; the politics and everything, and we’re 10 years into a recovery. It's not been the most boisterous of recoveries, but 10 years into global recovery since the global financial crisis. You call it the global financial crisis but in Britain, we just call it the financial crisis because it was in our street, right? There was a queue outside a bank. But that's neither here nor there.

You have to be worried and nervous given the volatile politics and the old cycle that things might turn over at some point. You have a combination of a very, very volatile world and really quite unvolatile markets: the markets are not reflecting the volatility of the world. And that makes me nervous about the market as a whole and tells me that it’s probably a decent idea to get into the companies that aren’t volatile, even when the world does get volatile.

At some point, earnings for the market will fall and fall dramatically when the next downturn comes. In the last global financial crisis, this portfolio's earnings went up and that's a distinguishing factor. So, if you're like me and you don’t know what’s going to happen, own the companies where it really doesn’t matter what happens. 

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