As the global economy moves towards late cycle, ensuring that multi-asset portfolios remain suitable for investors means managing a whole range of risks.
In a podcast for InvestmentEurope, hosted by Jake Moeller, Head of UK and Ireland Research at Thomson Reuters Lipper, I discuss the macro environment and give an update on our global credit, inflation and equities views.
The macro environment
“The term ‘late cycle’ can mean a lot of different things to different people. The current bull market has lasted since 2009 and is one of the longest periods since 1945. Expansionary phases have typically lasted between two and five years. We’d see three key risks that could derail global growth: a China ‘hard landing’, populist unrest as a result of the ‘new political paradigm’ and central banks raising rates faster than the market anticipates.”
Opportunities in the market
“We’re focused right now on those assets we might consider ‘mid-risk’. By this I mean areas such as listed infrastructure, global REITs and hard currency denominated emerging market debt. These tend to be a bit more defensive while continuing to offer potential in this economic environment. Also, style rotation is becoming more and more important. While value hasn’t performed as well throughout most of this economic cycle it tends to do better in the later periods so carefully positioning portfolios between quality and value is key.”
Not chasing income
“If you chase, your portfolio risk becomes unstable and, more importantly, client suitability then goes out of the window! We’re still in a rising rate environment after all and we don’t expect to reach normalisation levels before the next recession. That being said, there are some attractively valued areas which continue to offer income. For instance, emerging market debt still yields over 5% and is attractively priced relative to other fixed income assets.”
“From our perspective, we don’t think there’s a bubble brewing in global credit. What worries me is the liquidity of the asset class. In periods of market stress, it’s the assets that have a liquidity premium which tend to suffer so corporate bonds, both investment grade and high yield, can be quite expensive to trade in that environment. That’s why I’d rather be a liquidity provider as this tends to be rewarded when the market needs it most. You could say that we’re keeping our powder dry because when volatility increases there’ll be a chance to get in at a good price.”
“From an equity perspective, the big difficulty is that we see China as a medium-term risk. To deal with their debt situation, as they have begun to do recently, they’ll have to sacrifice some of their growth. Instead, we’re looking at the emerging market countries we think will be winners over the next five years such as India, a country with a strong reform story. The Indian market also tends to be less correlated with the wider market which can be beneficial if volatility returns to normal levels. Emerging market debt is also quite an appealing prospect. As capital reserves have been built up over recent years, the default risk in hard currency denominated debt has fallen.”
“Currencies are a real puzzle for multi-asset portfolios – certainly the sterling/non-sterling risk if you’re a UK-based investor. We’ve had to adapt the portfolios more and more to deal with currency movements in recent years. As rates continue to rise and central banks pursue quantitative tightening policies, currency volatility will rise and managing that risk is vitally important for investors looking to provide a suitable solution for their clients.”
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