What are the main risks to investors’ portfolios in the current post-Trump, post-Brexit world of heightened political risk and populism?Alex Lindenberg: The challenge from an investor’s perspective is that it’s all very binary, there either is regime change or there isn’t. You’ve got to be right on that call and you also need to be right in terms of what the implications are from an investment perspective. The risk is not so much the external events; it’s more that investor behaviour might be influenced in a way that’s not constructive, so you might panic, you might act in a way which is not consistent with your risk budget. Many UK investors might have hedged their currency exposure prior to the Brexit vote which ultimately wouldn’t have been beneficial to them, so it’s the risk that you’re blown off course and that you don’t stick to an agreed plan which has potentially served you well for many years, I see that as almost a bigger risk than some of these external factors.
John Arthur: We’re now looking at inflation at least moving back to 2% to 3% per annum and that creates a lot of challenges because a lot of liabilities are linked to inflation and some assets are linked to inflation. That regime change is more probable because of Trump and Brexit and populism. Everything you see suggests an element of priming the economy through greater fiscal spend, a move away from monetary support to fiscal support potentially and a lagged response to an uptick in inflation.
Julian Pendock: QE, by distorting the price of money and the price of risk as central banks have done, has led to a misallocation of resources, mal-investment, zombie banks with zombie companies. It’s not surprising that has led to regime change or political regime change. When suddenly people think that the regime they’re living in – I don’t mean political regime, but the whole structure – cannot structurally deliver the economic growth that they want once the immediate crisis had passed and almost always, then people get rid of their whole structure of government. Michael Cantara: There are a few structural headwinds to overall growth and it’s extremely high levels of both public and private debt on a global basis; that limits the amount of future borrowing for any fiscal programme. Also, when you look at economic growth being the result of productivity gains or hours worked, that is decreasing and has been doing so since the turn of the last century. I read something recently that the average hours worked in 1900 was about 50; today it’s 32.8. That’s pretty significant. The working age population in developed markets and in many developing markets is declining – in China, so that’s going to have an impact or a limiting effect. The last, probably most significant, is disruption from technology and so all of those elements have some deflationary aspect to them. We still continue to see some inflationary pressures near term but these limiting factors, from a structural standpoint, will override those at some point in the future. Pendock: What worries me is that the desire now is to go into asset classes where you have to take a ticket, wait in line for three to four years, and chase an illiquidity premium which has been crushed with high prices and therefore low yields, it’s a Hotel California trade so you can’t get out. To me the distribution curve would have been flattened, so correspondingly the tail risks at either end have gone up, so when you looked at risk, whether it’s binary or spread across, the price of getting it wrong, because of the asset classes we were being forced into, is possibly higher.
Richard Greening: People are just taking more and more risk all the time. If you look at bonds for example, they’re not called “junk bonds” any more but that’s the direction that’s being taken. It’s difficult to see how a debt mountain can be overcome by anything other than a very serious level of inflation or some external factor that will relieve the pressure. It’s very difficult to see how they will recover their position. So, there has to be some significant break; the question is when it will occur.
Arthur: Funds are chasing yield and looking at more illiquid asset classes, but if we do go through another ‘07 and increased correlation, the issue is to not be a forced seller; the liquidity premium is always there. So, the important thing with any of these asset classes is to go in to them with a view of holding them as a buy-and-hold strategy to match your liability profile, your cashflow profile or whatever the requirement is; they are 20 year assets.
Cantara: We always talk about volatility as a bad thing. It depends how you’re positioned; if you don’t have the liquidity to take advantage or exploit those opportunities that get thrown out or thrown up as a result of market volatility, that could be limiting. If you’re making decisions based on long-term focus and analysis, that’s where there’s really an opportunity.
Pendock: It’s one of my bugbears that people use “volatility” as shorthand for “risk”. Even in a fixed income space, if you know that the counterparty is money-good and you’re going to get it back at the end, it would be all over the place until in the final bit you get a pull to par and, happy days, you get your money back. In which case, people should just shut their eyes and not worry that the price of the bonds is up and down, it is what they’re getting at the end that is relevant.
