MANAGING RISK IN UNCERTAIN MARKETS
BY IAIN TAIT
Investors rarely agree on many things and frankly that has to be a good thing, given that divergence of opinion is what makes and drives any market. However, one area where all market participants agree, is that long-term uncertainty is not a good thing. Macro, global uncertainty has become so engrained in sentiment, it is hard to remember a time when the Brexit / Trump impact was not at the forefront of our minds. But could that all change in the next six months? Or, rather like that brief moment earlier in the summer when football just might have been coming home, could that just be a sense of false hope? Either way, how does market sentiment opinion change how investors manage their risk profiles?
The reason I ask all of this is that by the end of 2018; the US midterms will have taken place, Brexit negotiations will have concluded, we will have a better idea of whether the current global trade wars are more rhetoric than substance and in domestic economics, we will have a better feel of the impact of the recent interest rate hike. In short, as investors we ought to make the most of the calm now, because there will be a lot to take in over the next 4 months or so.
Let’s start with the US midterms and to continue the footballing analogy, these elections could feel a bit like the Europa League. It sneaks up on you quietly and very few actually understand the point of them. However, in such polarised politics, this one does matter. Historically, US Presidents have lost Congressional seats at midterms, but there are many who believe that the Democrats could struggle to make significant gains. A glance at Trump’s popularity rating within his core vote, combined with continuous strong economic signals would point to this. Whilst I am not suggesting that this is a foregone conclusion (the last couple of years would warn against that!), if Trump can cement his core level of support, it would offer every indication that he will take another four-year term in 2020. It doesn’t matter if you agree with his policies or not, continuity of Government does offer perceived stability, and thereby less market uncertainty over US policy.
One area where there is no doubt that investors will have more clarity on is Brexit. Don’t worry, I’m not going to evaluate all the possible outcomes, as it’s October and we all need a break from that (and I’ve already overcooked the football analogy, so no need to mention that we are approaching penalty shootout territory). However, what we do know is that there are pretty rigid deadlines for final negotiations for any deal. By the end of 2018 we will have a much more defined idea of the UK’s longer-term relationship with the EU. Again, it doesn’t matter whether you agree with those conclusions or not, we will have some certainly. And, as we know, investors like that.
The same can quite easily be said for the UK economy. We have been waiting with baited breath for the BoE to act on interest rates. Earlier this year, we didn’t know when, we didn’t know by how much and indeed whether further short-term raises would occur. We now have our raise and the BoE has been clear that it expects any further rise to be limited and gradual. As the impact filters through the markets over the coming months, we will have more certainty.
So, whether you agree or not with how these major events will unfold, long-term investors will be able to take comfort from this new level of certainty. At the same time, investors will be all too aware of the short-term impacts of these events and this is exactly the raison d’etre of the Private Investment Office. Managing that short-term risk, whilst building portfolios that can take advantage of long-term opportunities is the key to our investment thesis. We manage this on a bespoke basis for our clients day-in, day-out. For the moment, however, my best advice will be to make the most of the rest of this period of ‘calm’. We are in for quite an end to 2018, but are confident that those longer-term opportunities will emerge with greater clarity during that time.
To speak to Iain or a member of the Private Investment Office, please call 020 7396 3388 or email firstname.lastname@example.org
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