Thoughts from the Investment Desk
Political issues continue to dominate the headlines - tariffs, North Korea, Brexit and European populism - and in most cases the political environment suggests some caution is warranted.
Political issues continue to dominate the headlines - tariffs, North Korea, Brexit and European populism - and in most cases the political environment suggests some caution is warranted. Whilst tweets and elections get the most attention, we actually view political risk as a chronic headwind. The lack of progress for “the many” has resulted in a more extreme political environment as people look for new solutions to the lack of economic growth and this is likely to be true for months (and possibly years) to come. However, for the summer we would urge investors to focus on more traditional concerns, namely the liquidity environment.
At the beginning of the year we stated that “3 was the magic number” in that we expected global GDP growth to remain stuck around 3% and we viewed 3% on the US 10 year as a challenge to US equity valuations. Since then, global GDP growth has remained around 3% which is a benign development but US yields keep pressing on 3% and more importantly, the ECB may soon join the Fed in unwinding its emergency monetary measures through quantitative tightening. As stated before, this poses a speed limit to returns and we are progressively shifting the portfolio to a less equity-centric, more cautious stance. So far our emphasis has been on allocating out of equities and into assets that we feel are less vulnerable to stagflationary risks such as TIPS and commodities. To the extent that we own government bonds we have favoured Australian government bonds but US bonds are starting to offer some value relative to their European counterparts.
After their recent wobble, emerging market currencies look cheap, in our view. The tightening of dollar liquidity remains a challenge as we head into the summer however, and so we are offsetting some of our emerging market risks through long positions in the Japanese yen against the euro as this cross tends to benefit from risk aversion, particularly give the potential for European political stress.
As markets reprice to reflect the tightening of liquidity, we may see some good opportunities to re-enter risk positions in the fall. For now, we remain patient and vigilant.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.