Geopolitical Change and Asset Class Rotation

Christopher Peel - Chief Investment Officer

2017 is shaping up to be a year of momentous geopolitical change, especially in the United States and in the United Kingdom.

Democracies on both sides of the Atlantic have voted in favour of a shift towards nationalism, protectionism and the pursuit of greater sovereignty. It is far too early to predict the long-term market implications of these surprising political events. Investors will need to rely on strong risk management, portfolio diversification and patience during periods of heightened volatility.

US President Donald Trump is unconventional in many ways, but his actions since inauguration have been predictable in that he appears to be firmly intent on honouring all of his campaign pledges. The executive orders that he has signed during the early days of his administration make it clear that he is a man of his word and means business.

The vocal minority in the US and many of the world’s political leaders may not like his policies, but Middle America swept him to victory and these voters are getting exactly what was promised. The Trump rally in the US equity markets is not surprising given his radical views on existing trade relationships, infrastructure spending and border controls. In time, US based manufacturing companies will regain the market share lost during the last quarter century, especially at the expense of bordering countries such as Canada and Mexico.

Brexit was arguably a protest vote against EU bureaucracy, Eastern Europe immigration and the failings of the single currency. The fact that neither the “Stay” nor “Leave” campaigns could articulate the true cost of membership was also a key factor in the final decision.
Prime Minister Theresa May has made it perfectly clear that “Brexit means Brexit”. The UK will leave the EU two years after triggering Article 50 of the Lisbon Treaty, and it will also lose its unrestricted access to the single market.

The government will eventually negotiate separate trade agreements with countries such as the US, China, and Australia. The UK is in a strong negotiating position to retain most of its current trade flow with the EU, given that it purchases more goods than it sells to the continent. These new trading relationships will ultimately lead to a strong recovery in sterling and a more balanced economy, which is already the strongest within the G7 countries.

Further asset class rotation out of long-duration bonds into risk-assets will be the key to performance in 2017.
The return of inflation and the winding down of the “QE” programmes have brought an abrupt end to the thirty-five year bull market in bonds.
Global GDP is forecasted to be in the region of 3.5% to 4.0% this year and corporate earnings are in line with equity market valuations. Sterling-hedged portfolios comprised of diversified, short-duration investment grade corporate and high yield bonds, global equities, commodities and non-UK property offer the best chances for positive returns.
Patience will be required to navigate the potholes in the political roadmap, but ultimately investors will be rewarded for increasing risk throughout the portfolio.
This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person.
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