For the first session of our 2018 investment conference in London, I chaired a panel that discussed some of the macroeconomic ideas defining the investment setting at the moment, with particular emphasis on the concerns raised by our clients.
With significant geopolitical tensions and uncertainty, there are many questions in today’s environment. The general market consensus is that we are entering another end-of-cycle phase, but will it be different this time? In a world where yields on most conventional assets have been compressed, how should investors seek to meet their objectives?
We asked the audience what concerns were currently at the front of their minds, and we received votes across all six of the potential options: generating growth, generating income, avoiding volatility, protecting against inflation, investing sustainably, and Brexit considerations.
With Brexit a key concern for many, both our chief investment officer Curt Custard and Real Return portfolio manager Suzanne Hutchins emphasised the need to think about the bigger picture and the long-term implications of these political changes. Curt felt that Brexit is likely to play out over many, many years. At the strategy level, we have stress-tested all our portfolios for short-term impacts, and discussed what changes we would make over the medium term, depending on the outcome of the Brexit negotiations. However, no one can predict exactly what is going to happen, and we remain engaged and proactive as the situation unfolds.
Curt suggested that markets may respond first with shock volatility, which will probably manifest itself in currency movements. However, currency typically operates as an escape valve, much like the valve on a kettle that opens to let the steam out. Following this, we may see the volatility move into rates. In terms of what it means for the economy, people and companies, we will have to see. The market tends to be bad at predicting the impact of politics on the market itself.
Investors and CEOs can play by almost any rules – capitalism has existed under a variety of political regimes – but they need to know what those rules are. The worst thing that can happen is persistent uncertainty, making this a difficult time currently for the economy and financial-market participants.
Suzanne highlighted that the Real Return team is focused on the major structural trends in the market and the economy that they think will frame the backdrop. These trends tend to involve debt, demography, distortion and disinflation, all of which are key factors to watch over the coming years.
End of the Cycle?
Suzanne went on to reiterate that this has been a year of transition. As high valuations meet rising interest rates and policy and liquidity tightening, the environment for risk assets is challenging. Against such a backdrop, cautious positioning, avoiding many of the areas seeing stress, may be advisable.
Multi-asset portfolio manager Paul Flood spoke about the task of managing both absolute-return and income strategies in his role. He emphasised that there are many assets that suit both absolute-return and income strategies, and that many of these assets can provide diversification, which can be extremely useful during periods of volatility in the capital markets. In fact, volatility can be an important opportunity to reallocate capital and better position portfolios for the future.
Having experienced a decade of unprecedented growth since the global financial crisis, we discussed whether the current cycle is likely to end like the last one, or if this time things could be different. Paul suggested that, having been scarred by the financial crisis, many investors have become more focused on the short term, which can be misguided given the time horizon for the investment in question or an investor’s specific aims. In particular, the time horizons for defined contribution and defined benefit schemes are still long, and investors can benefit from such an extended timeframe.
Our head of research, Duncan Bulgin, spoke about the importance of stepping back and gaining a sense of perspective. Looking at the last two decades, following the bursting of the tech bubble in the early 2000s, the financials sector led the market, followed by materials, energy and utilities. After the 2008 crash, industrials took over, followed by health care, and now technology has taken the reins once more. Each sector has led the market at a different point in history and we are likely to all benefit from placing our current situation in context. There are always pitfalls and opportunities.
Responsible Investment Focus
That being said, there are notable developments in the industry to be aware of. Corporations are now treating investors as stakeholders, rather than merely as shareholders. Environmental, social and governance (ESG) analysis has been a key consideration for us since our inception as a firm and we integrate responsible investment principles into all our portfolios as we believe it leads to better investment. Paul reiterated how our responsible investment team helps us to avoid companies with material ESG concerns that could suggest greater risks and instability in their business.
This panel aimed to bring our clients’ concerns and questions to the forefront and provide more clarity as to our views on the current macroeconomic situation. A key theme was keeping perspective and appreciating the long-term view; there is a lot of uncertainty at present and we remain focused on each development as it comes, seeking to ensure that our portfolios are well positioned for a variety of outcomes.
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