NOVEMBER 2017 | LEADING EDGE | 17
Trevor Greetham Head of Multi Asset
triggered the banking crisis in 2008. Growth is steady, and there is no sign of the late-cycle surge in wages that leads central banks to raise interest rates meaningfully. Banks have significantly increased their capital buffers to satisfy tighter regulation since the financial crisis and, if anything, markets are tending towards excessive bearishness.
could drop again. On the other hand, a soft Brexit could be positive for the economy and for property markets, but the resulting sterling strength may limit returns in a partial reverse of the 2016 dynamics. We believe investors with a low risk appetite should avoid taking a view on the negotiations and hold most of their assets in sterling.
What does Brexit mean for investment returns?
What about geopolitics?
Despite expectations that portfolios would fall in value post the EU referendum, 2016 was the best year for multi asset investors since 2009, as a 15% drop in the value of sterling boosted the value of overseas investments and the UK equity market, which sources 70% of its earnings overseas. From where we are today, we see significant two way risk for the pound. A ‘hard’ Brexit or a ‘no deal’ outcome would be negative for the UK’s economy, and the pound
We believe that investors remain sensitive to geopolitical risk and that it is likely that we will continue to see bouts of risk aversion, with hawkish central bank rhetoric, North Korean tensions and concerns over Chinese growth probable sources of volatility. However, each pause in the current equity rally has been followed swiftly by a new upward trend, as macroeconomic fundamentals, which are the real drivers of markets, remain supportive.
Global stocks vs. bonds and US unemployment rate (inverted) 2.2
3
2.0
4
1.8
5
1.6
6
1.4
Investor sentiment and stock prices Our investment models enable us to adopt a high-conviction view on economic fundamentals, while our sentiment indicator (above) guides our shorter-term positioning: significant falls in investor sentiment, generally caused by geopolitical risk events, trigger ‘buy’ signals. We added to our overweight position in equities in the summer as sentiment fell sharply following the heightened tensions between the US and North Korea. A positive fundamental view makes us more likely to buy dips than sell rallies. Don’t get it twisted We believe the current economic cycle has some way to go. With inflation low and growth steady, the outlook for equities remains constructive, particularly while central banks opt for incremental tightening. There will be bumps along the way but with cash losing its purchasing power on a daily basis, it pays to stay invested.
Watch our latest monthly video from Trevor: www.investmentclock.co.uk
7
1.2
8
1.0
9
0.8
10
Global stocks vs. bonds
20 15
0 20 1
05 20
20 00
5 19 9
19
90
0.6
US Unemployment rate, (RH Scale, inverted)
Source: Thomson Reuters Datastream as at 19/09/2017
*Source: Source: RLAM as at 31.08.2017. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Simulated returns calculated using total return data for the underlying asset classes, taking a 1% fee into account. The composite weight is made up of 50% global stocks and 50% UK government bonds.