24th November 2016
Spread your assets far and wide, diversify to dilute the pain and to participate in the gain, says Rowan Dartington’s technical investment director Guy Stephens
The investment markets are a real conundrum at the moment. The so-called Wall of Worry is exceptionally high but we have to continually test our outlook assumptions and decide whether to change tack.
There has been a marked pick-up in volatility since the Brexit vote with either significant losses or significant gains in all asset classes with very little remaining stable.
That said, the one asset class, and perhaps the most important and widely held risk asset that has remained solid if not making gains has been equities. We are told that equities hate uncertainty and we currently have more uncertainty than we have had for some time on many fronts, but the asset class remains solid and seemingly well supported on any weakness. Why is this and is it about to change?
Bond markets are undergoing a rout with 10yr treasuries putting on almost 1% since the summer, and much of this following the election of Trump and perceived higher inflation ahead as he goes on his reflationary spending spree next year. The trend in rates has turned and looks set to continue.
Commercial property for the UK investor looks vulnerable to a hard Brexit and a slowing in consumer spending as we begin the agony of triggering Article 50 and enduring whatever lies ahead. The economy is likely to slow and that usually crimps companies’ expansion plans and that reduces demand for property, domestically but also from overseas whilst the future international trading environment is so opaque.
So that leaves equities as the only major conventional asset class that gives both yield and real earnings growth to protect against the pick-up in inflation. And that probably explains why the asset class has been so sanguine. The least worst choice out of a poor hand where the negatives are hardest to define clearly.
There may be a three month window before we hear anything substantive to upset the equity market but investors should not rely on the psychological comfort blanket of the recent Brexit and Trump obstacles being overcome.
If Trump is successful with his protectionist policies, most agree this will lower world growth and is generally counterproductive. This would be the equivalent of the UK unilaterally putting tariffs on imported steel from China to protect jobs in Port Talbot and Ravenscroft. The end products produced would have to rise in price and would ultimately fail to compete and the jobs would go anyway. The only solution is to invest to drive down costs and increase productivity.
Trump has promised the redundant workers of Cleveland and Detroit that he will get their jobs back from China. His government appointees so far are reputational nationalists – it is looking like he will be taking on China big time and that is bad news for world growth and we all know how paranoid investors are about Chinese growth slowing.
Within equities, Dollar earners have continued to be strong as the currency has strengthened but this is no reflection of their underlying fundamentals but merely one-off translational benefits as Sterling has remained weak.
Income stocks and defensive bond proxies have sold off, with the bond markets, and domestics remain Brexit caveated. Even gold, for the really bearish, has been weak as the Dollar has strengthened with investors flocking to the Trump reflationary theme.
Emerging markets have been weakest on Dollar strength and in anticipation of Trump’s tariffs whist Europe is about to begin its own populist revolution with the Italian referendum on 4th December and election fever throughout 2017.
Cash looks appealing but gives zero return if not negative in absolute terms or real terms and increasingly so as inflation rises.
At times like this, there is only one strategy to follow. Spread your assets far and wide, diversify to dilute the pain and to participate in the gain, from wherever it may come.