Asset Manager Review
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-