As­set Man­ager Re­view

The Star Late Edition - - COMPANIES - Is ex­pe­ri­enc­ing a

seem­ingly ir­ra­tional be­hav­ior.

In the light of this chal­lenge, we ask the man­agers for a fore­cast that they be­lieve to have a high like­li­hood of tran­spir­ing, as well as one they con­sider to be highly un­likely.

But es­tab­lish­ing a frame­work of man­agers’ views, and con­se­quently their port­fo­lio po­si­tion­ing, can be a valu­able in­sight for the in­vestor. There also ap­pear to be defin­ing themes which in­vestors must be cog­nizant of.

The world cri­sis of trust

Last year (2016) will be re­mem­bered as a year in which pol­i­tics be­came a ma­te­rial driver of un­cer­tainty, a trend likely to con­tinue un­til the causes are ad­dressed.

Tellingly, in­creased po­lit­i­cal risk is man­i­fest­ing in de­vel­oped economies. The IMF warned in Oc­to­ber 2016 that po­lit­i­cal risk in ad­vanced economies is the big­gest threat to the global econ­omy, some­thing hereto un­heard of.

Another change is that while po­lit­i­cal risk is usu­ally be­tween coun­tries, to­day it is found within coun­tries.

The chang­ing po­lit­i­cal en­vi­ron­ment is ex­pected to have an in­creas­ing ef­fect on eco­nomic pol­icy.

The IMF’s chief econ­o­mist, Mau­rice Ob­st­feld, re­cently com­mented that eco­nomic growth “has been too low for too long, and in many coun­tries its ben­e­fits have reached too few – with po­lit­i­cal reper­cus­sions that are likely to de­press global growth fur­ther”.

The re­sponse by global cen­tral bankers to an en­vi­ron­ment of struc­turally low growth, de­fla­tion­ary pres­sures and high debt lev­els has been to keep in­ter­est rates at ar­ti­fi­cially low lev­els.

The prob­lem is that quan­ti­ta­tive eas­ing (the print­ing of money) ben­e­fits those that touch it first and least, if at all, those that touch it last.

The re­sult has been a widen­ing gap be­tween “haves” and “have nots”, which is in turn driv­ing pres­sure for po­lit­i­cal change.

A lack of trust in gov­ern­ment, cor­po­ra­tions and the me­dia has been the na­tional re­sponse the world over. Brexit and the elec­tion of Don­ald Trump are re­flec­tive of this de­sire for change.

And pol­i­tics can drive eco­nom­ics. These pow­er­ful po­lit­i­cal changes will have a long-last­ing im­pact on the global econ­omy and fi­nan­cial mar­kets.

The out­look for as­set class re­turns needs to take into ac­count the po­lit­i­cal-eco­nomic frame­work likely to pre­vail.

A struc­turally low rate of global eco­nomic growth

The cur­rent cy­cle has seen the weak­est eco­nomic re­cov­ery since the Great De­pres­sion. Some im­prove­ment is ex­pected in 2017, driven by emerg­ing economies, although per­for­mance amongst coun­tries is likely to dif­fer markedly.

Ex­port-driven man­u­fac­tur­ing na­tions who are im­porters of commodities may per­form best.

Hence, we ask man­agers for their thoughts on in­vest­ment re­turns in a pos­si­bly ex­tended pe­riod of low growth, to­gether with their views on the link be­tween the two. “Trumpo­nomics” The elec­tion of Don­ald Trump is ex­pected to bring sig­nif­i­cant change in the USA, and there­fore in the global land­scape. Im­por­tantly, the im­pact is likely to af­fect coun­tries and eq­uity sec­tors dif­fer­ently.

Fis­cal pol­icy is ex­pected to be a key driver of eco­nomic growth, with a par­tic­u­lar fo­cus on in­fra­struc­ture in­vest­ment.

For a num­ber of years, cap­i­tal ex­pen­di­ture by large global cor­po­ra­tions has been notably low, de­spite high cash flows. There is scope for greater pri­vate sec­tor fixed in­vest­ment.

Fis­cal spend­ing in the US is ex­pected to be debt funded, bring­ing sub­stan­tial chal­lenges in years to come, and pres­sure on US long-term in­ter­est rates.

Trump has crit­i­cized the re­cent poli­cies of the US Fed dur­ing his elec­tion cam­paign, and it seems likely that he will op­pose moves to raise short-term rates too quickly, pre­fer­ring a more stim­u­la­tory approach.

The im­pli­ca­tions of this re­main to be seen – has the US bond bull mar­ket, which has lasted a mam­moth 34 years, fi­nally come to an end?

Trumpo­nomics is ex­pected to see a rise in pro­tec­tion­ism. Glob­al­iza­tion has un­doubt­edly played a large role in grow­ing the world econ­omy, even if the ben­e­fits have not been evenly dis­trib­uted.

Any pro­tec­tion­ist poli­cies, in­clud­ing pos­si­ble re­tal­i­a­tion from af­fected coun­tries, are likely to be an even­tual head­wind to global growth.

Trump’s poli­cies are ex­pected to im­pact the US Dol­lar. We have lived with a strong Dol­lar, and in­ter­est rate dif­fer­en­tials would be ex­pected to main­tain this strength.

But Trump is ad­vo­cat­ing a more com­pet­i­tive cur­rency.

China is likely to re­main a source of in­vestor un­cer­tainty as the coun-

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