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?

Finweek English Edition - - COVER INVESTMENTS - By Mariam Isa

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.

Un­cer­tain times

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

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