Time for a ‘risk-on’ mindset
The last few years has seen a definite trend towards passive rather than active investing, but with the recent political surprises worldwide, is that still the best way to go in 2017?
globalfinancial markets are entering what is likely to be a sustained period of volatility created by unexpected and unsettling political events – Donald Trump’s US election victory, Britain’s exit from the EU, and the rise of right-wing populism in Europe.
These events and their aftermath have generated an unprecedented level of political and economic uncertainty which is likely to last for several years, making investment choices more difficult and their outcomes less predictable.
Asset managers are divided on whether this signals an end to the bull market in equities seen since the global financial crisis ended eight years ago, although there is a prevailing view that investors should expect lower yields in many asset classes.
Most believe that the rise of “passive investment” in indexed mutual funds and exchange-traded funds (ETFs) will continue as these offer hard-pressed retail investors lower fee costs and less punitive tax implications.
However, they all argue – perhaps predictably – that active investment strategies as well will be essential as trends seen over the past few years end and interest rates climb in the US. Trump’s promises of sweeping tax cuts, and of $1tr of infrastructure spending have spurred anticipation that growth in the world’s biggest economy will accelerate, lifting the global economy as a whole.
In its latest economic outlook at the end of last month, the Organisation for Economic Cooperation and Development (OECD) predicted that US growth will quicken to 2.3% next year and 3.0% in 2018, boosting global growth to 3.3% and 3.6% respectively in those years.
However, there is also concern about how easily Trump, the businessman turned politician, will achieve his aims – and trepidation over the possibility of trade wars as he withdraws from long-standing global agreements and complains about the strength of China’s currency.
In Europe, the fallout from Brexit will make itself felt for years to come and the continent is braced for the rise of right-wing political leaders as populations rebel against government austerity and the influx of millions of immigrants into their countries.
There is even a very real risk that other countries will leave the EU. This process kicked off on 4 December, when the Italians voted against constitutional reform. This had led to the resignation and dissolution of Italy’s government, triggering a political crisis and possibly an election.
On the same day, however, there was a re-run of Austria’s presidential election after a knife-edge result in May was cancelled due to voting irregularities. This time, Norbert Hofer of the country’s right-wing Freedom Party was defeated by his Green Party opponent, Alexander Van der Bellen. Hofer had promised to call a referendum on EU membership if Turkey is granted accession or if Brussels consolidates more power.
In France, National Front leader Marine Le Pen could emerge victorious after first and second rounds in April and May. She also has a strong Eurosceptic and anti-Islam stance – worrying for the country’s large Muslim population – and has pledged to hold a referendum on France’s membership of the EU.
Far-right Dutch leader Geert Wilders – who is being tried for hate speech and discrimination, is nonetheless tipped to become Netherlands’ next prime minister after an election in March. He has also vowed to call a referendum on Dutch EU membership and to end immigration from Muslim countries.
In keeping with the pattern, Germany may be confronted with a shock federal election
Marine Le Pen National Front leader