Investment risk comes in many forms, as emphasised by this month’s wealth management experts: keep calm, but don’t be blindsided by neglecting today’s manifold dangers.
A US rate hike from the Fed looms.
Inflation tipped to hit bond and other interest-rate sensitive assets.
Volatility tipped to spike in response to interest rate changes.
UK house builders, REITs and banks expected to rally .
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Looking ahead to June, the expert investment views cover interest rate and inflation expectations are top of the investment agenda, along with – of course – the forthcoming EU referendum and its impact on portfolios.
Chris Darbyshire, Chief Investment Officer at Seven Investment Management, says:
“Stock prices have reached what looks like a permanently high plateau”, stated Irving Fisher, the (otherwise) brilliant economist, three days before the 1929 Wall Street Crash. Similar statements were expressed during the internet boom. Now, sentiment seems similarly entrenched, but in the reverse. It’s nicknamed the “New Normal”: an era of little economic growth or benefit from innovation. Productivity falls, inflation stays low, interest rates remain nominal, investment returns take a step down… you get the message.
So is this depressed state permanent? Markets seem to think so. Government bond yields are implying very low growth and inflation markets point to very modest price increases into the very distant future. But not all the evidence fits. Once volatile energy and food prices are removed, “core” US inflation is actually rising and has been for the past year. When examining this stripped-down inflation basket, the price hikes are largely across-the-board. Housing costs, medical expenses, services and even goods prices have bounced. If we really were in a deflationary world, most categories of expenditure should see prices falling.
That picture changes if we re-include energy and food to arrive back at the “headline” measure of inflation. Energy prices are a big component of this and have dragged it down. Oil prices cannot continue falling forever. Indeed, they have rebounded substantially from earlier lows. So the pull from oil is going to become a slight push as 2016 continues and both measures of inflation should show significant jumps, especially when you also count in rising wage packets.
A surprise change in inflation expectations could impair bond and other interest-rate sensitive assets quite dramatically, but hopefully some common sense may help investors and plateaued markets.
Chief Investment Officer at Seven Investment Management
Michael Pagliari, investment management partner at Smith & Williamson, says:
The next month is likely to be dominated by the Brexit debate, where even the Leave campaign acknowledge that there will be short-term repercussions for the UK economy following the referendum vote. Whilst the consequences for the UK are being widely debated, what tends to be neglected is the impact on the rest of Europe of a vote to leave.
However, putting political considerations aside, the key focus for markets will be as it always is: the macro. There is no doubt that the key disappointment for equity markets has been the surprisingly weak consumer demand despite gently improving household incomes and balance sheets. However, the very latest consumer data seems to signal more robust spending despite a mixed bag of economic indicators across the globe.
All eyes will be on the Fed meeting in mid-June. Expectations of a US rate hike have increased materially over the last few weeks and it remains to be seen how markets will react should the rate be nudged higher. I would expect the Fed to be very cautious of the potential consequences of tightening financial conditions on the global economy. A significantly stronger dollar would not be welcomed by US corporates and causes headaches for emerging markets hard currency borrowers. Markets have traded in a tight range for the last month, but volatility is likely to spike as the markets try to extrapolate the path of interest rates for the rest of the year.
Investment management partner at Smith & Williamson
Garry White, Chief Investment Commentator at Charles Stanley, says:
There are two major events in this month that could determine market direction – the Federal Reserve’s meeting on June 14-15 and the UK’s EU referendum on June 23. The outcome of both remains uncertain.
Comments from the Federal Reserve got significantly more hawkish as May progressed – in direct contrast to chair Janet Yellen’s decidedly dovish last major speech. The US is on the verge of meeting most of the economic conditions the central bank has set to increase interest rates. These are: to see additional signs of a rebound in the economy in the second quarter; further strengthening in the jobs market; and inflation moving towards its 2% target. However, markets have been burned by hawkish signalling by the Fed before and a rise this month is no means a done deal.
This is especially true as the interest rate decision is announced a week before the outcome of the Brexit referendum. The latest polls are showing that the Remain camp appears to be gaining traction – and the bookies also believe that a vote to leave is unlikely – but both the pollsters and the bookies failed to predict a Conservative majority at the last general election. However, if they are correct, UK sectors that have been hit on Brexit fears are likely to rally. These include house builders, REITs and banks. If you believe the bookies are correct, these sectors are good homes for your cash.
Chief Investment Commentator at Charles Stanley
Lee Goggin, Co-Founder of findaWEALTHMANAGER.com, says:
The debate around Brexit will remain centre stage for a while and although opinion polls do look to be favouring the Remain campaign, the twists and turns ahead of the final vote will produce some interesting debate no doubt. This will keep the politicos happy, but I’ve wondered recently if the forthcoming Euro 2016 football tournament in France will affect the way the UK population votes on the 23 June.
The vote happens right in the middle of the tournament and whilst not everyone will be cheering for England, on the football field, a large proportion of the population might be swayed by our team’s success or otherwise. By progressing well in the tournament would we be more benevolent towards our friends in Europe and inclined to vote to remain? On the other hand, if we were to perform poorly and let’s be honest, it has happened before, will we feel less inclined towards Europe? I’m not sure we are that fickle, but what worries me is the thought that the Remain side will assume everyone else will vote and they don’t need to, thus allowing the Brexiters in via the back door. So make sure you vote whatever your feelings about politics or football.
And what does that all mean for your investments? Hang in there is probably the best advice and get some timely advice from a professional adviser. The wealth managers on our panel are deploying strategies to mitigate the various risks clients’ portfolios face now.
Co-Founder of findaWEALTHMANAGER.com
David Cooke, Investment Manager at Saltus Investment Managers, says:
We have a long held view that Brexit is a “tail event” i.e. something not likely but if it happens, liable to have a big impact. Initially that impact would be negative and the pound, stocks and gilt markets would be impacted. The pound would take the first hit and could fall as much as 10-15%. Stocks would likely do the same thing, although there is a big debate over whether big companies or small ones would be hurt more.
It would also knock on into the rest of the world (especially Europe) given that the general global backdrop is uncertain/skittish for a number of macro reasons (slowing economic growth being the big one). We anticipate that European equities would fall by the same order of magnitude as the UK, as Europe is not in great shape and they need this event like a hole in the head.
We would stress that this risk is just one of many big, global risks. We could vote to stay in and then have, for example, a Chinese currency crisis, which would impact UK markets to a similar extent.
Investment Manager at Saltus Investment Managers
Giles Rowe, Chief Executive and Chief Investment Officer at Henderson Rowe, says:
Is the pre-Brexit hiatus a great opportunity for investors? Anti-Brexit scare stories from the IMF and the Treasury are matched by warnings of the dangers of remaining in a sclerotic EU by the Leave camp. The politicians are playing a high stakes game – essentially for themselves – and the reality is that with either post-referendum outcome we will avoid the extremes. Most of the forecasts are mere speculation; we all know the arguments by now. It is easy to be mesmerised by the uncertainty.
So, how important is Brexit for our investors specifically?
Most of our clients are invested in international portfolios. Given this mix we believe the impact of Brexit should be relatively muted, but mainly transmitted through currency impact. If sterling collapses following a Brexit vote, we would expect our portfolios to see the benefit. But if the vote is Remain, as expected, then a sterling relief rally could take place, although the reality of the UK’s cavernous trade deficit might soon put paid to that.
Net, we remain biased to overseas weightings for most clients. What about European assets? Financials are most exposed either way and we are reducing our holdings here anyway for other reasons. But the range of possible scenarios after a Brexit is too complex and quickly reduces to a range of guesses. Recent experience shows it is counterproductive to make major portfolio moves for risks that are all over the headlines: the BP Macondo and Fukushima disasters, the US Debt Ceiling Debate, Scottish Independence and the last General Election are recent examples.
So we see our portfolios as well positioned for the balance of risks. Indeed, for people sitting on the side with cash, we believe this is a good opportunity to put at least some money into the market. The December sell-off has been followed by a strong counter rally and there is still plenty of fear beneath the surface – which is normally bullish.
Chief Executive and Chief Investment Officer at Henderson Rowe
Daniel Adams, Senior Investment Analyst at Psigma Investment Management, says:
The notion of technological change and the “internet of things” is incredibly well documented; many have even termed it the fourth industrial revolution. This might be a strange concept for many to grasp (not just technophobes). I believe this can be partly explained by the outcomes, which are less tangible than in previous industrial revolutions; take apps, peer-to-peer lending or artificial intelligence as prime examples. However, the scale of the disruption we’re currently seeing really is quite extraordinary.
The change is hugely beneficial to the consumer, but identifying how to play that is incredibly challenging. The implication of this trend is not only resulting in a fundamental change to established business models, effectively turning them on their head, but many of the traditional valuation metrics used to value companies have similarly become fairly redundant.
It would be remiss not to also make some reference to the impacts this movement is having on economic data points that economists, investors and central banks frame their decisions around.
While on the one hand productivity has increased, the displacement caused is incredibly deflationary at an aggregate level. Certainly, Bill Gross would agree as he eloquently covered off in his recent monthly muse: “Virtually every industry in existence is likely to become less labour-intensive in future years as new technology is assimilated into existing business models”. If, as Gross goes on to highlight, that this income effectively gets attributed to technological robots in whatever form, instead of humans, the result will mean that wealth becomes increasingly funnelled and concentrated to fewer and fewer people and places.
Senior Investment Analyst at Psigma Investment Management
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