My hope is that these quarterly updates will convey a clear message on where we think the world is heading and provide a link to potential investment ideas.
There is always noise in the financial markets, but the uncertainty in the political system is higher than ever. Normally, we don’t have to pay too much attention to politicians — they tend to come and go.
The current problem is that aggressive US moves on tariffs have significant implications for exporters and the global economy in general.
More agile companies will find their way in the chaos. But as investors, we need to be mindful of the dampening effect of tariffs on growth, the risk of higher unemployment and the related inflation risk amid cross-border supply chain issues more broadly.
Overall, this means that we are less willing to take equity risk, our view on duration risk is neutral and we prefer corporate over government bonds.
There are mixed signals in the currency market. On the one hand, these uncertainties are positive for the US dollar. On the other hand, there is a lot of political pressure in the US to create a weaker currency to support US exports. Furthermore, the dollar faces questions regarding its status as a reserve currency over the longer term.
Our view is that allocations away from the US, hedged or not, is healthy. In particular I am encouraged to see the lower weighting of the big ‘Magnificent Seven’ tech firms on the US equity indices. We have been warning about the risk of excessive concentration in a handful of companies. Elsewhere, we have a more positive view on Europe, which has done well this year.
The best news is undoubtedly the strong support for economic growth and defence from the incoming government in Germany. We saw a strong rally in European defence stocks, in particular. To be honest, this might be a bit overdone compared to their US counterparts.
Decoupling between the US and Europe is deepening. We follow the defence industry closely, and with pension funds more open to the idea of investing in this sector, it may become overcrowded.
The next wave of investment could, therefore, create benefits further back in the value chain — including providing support for a limping German automobile industry as a related outcome of the defence theme. This is something we debate with clients a lot these days.
I have visited Europe, Asia and the Middle East so far this year, seeing many large clients. Apart from the geopolitical situation, there is strong interest in growth forecasts, inflation expectations and bond yield curve movements.
Fixed income is back as an asset class of interest, and our RFP team continues to see requests from clients — not least for our short-duration offerings. We have also seen healthy interest in enhanced indexation products which combine low costs with the potential for excess returns by systematically targeting the drivers, or factors, of stock performance.
There is never a dull moment in our industry, yet the current situation can be scary for investors. My best advice is to adjust your risk levels, ensure proper diversification and don’t get distracted from those long-term investment goals.
In the Investment Outlook this quarter:
Paul Diggle offers his analysis of the latest in tariff news and explores how these trade levies may challenge some long-held assumptions that we have about investing.
Devan Kaloo encourages investors to lean into diversification as it may act as a shock absorber for portfolios amid market uncertainty.
Shelley Morrison gives us a fascinating glimpse into a little-known corner of the fund financing world that promises investors higher returns for no additional credit risk.
For those of you who need a primer on private markets, read Baldric Todeschini’s article as he explains why they may make sense in times of greater volatility.
Finally, Dan Grandage argues that, to modify a famous quote, reports of the demise of sustainable investing are greatly exaggerated.
As ever, I hope you enjoy these articles.