No-one would want to make light of the financial crisis but – intellectually for advisers and investors – it feels as if the next two or three years may be even more challenging.
There is a sense that many markets have overshot on returns. Company valuations in several major markets are well ahead of earnings. Bonds face a very obvious inflation threat and, given the taper tantrum, we know an increase in US interest rates and general tightening could send some very unwelcome shock waves around world markets.
I would add another issue to compound this – what seems like the inability of financial markets to properly judge political risks.
We know there is a very high risk of a Greek exit from the eurozone. I would argue there is an underestimated risk of Britain’s exit from the EU and a subsequent UK break-up, and both would be drawn out divorces.
Now I wish, as a writer for investment advisers, that I could accurately predict what was going to happen in markets and politics and you could all get on with planning your tactical allocations accordingly.
Yet I do think there is one rather useful intellectual exercise that might assist IFAs. That is that you put yourself in the shoes of overseas investors when it comes to considering the status and stability of the UK in terms of asset allocation, and then use that view to ‘sense check’ your approach domestically.
Fund managers and asset allocation experts did not expressly play down the risks associated with EU renegotiation for Britain. Yet with a few notable exceptions, most kept their counsel up to polling day and only felt the need to share their views of the risks of a ‘Brexit’ after Mr Cameron was ensconced back in Number 10.
We went from markets worrying about the death of capitalism to worrying about things being a bit toppyIt is interesting to see fund managers debating the approach to asset allocation calls, among other things focusing on duration, holding more cash, and worrying about whether defensives would live up to the name, when it all requires a degree of second guessing of the US Federal Reserve (Fed), European Central Bank and the Bank of England.
This takes us back to the reality of what advisers have to deliver for clients. The current market uncertainty strikes me as a considerable challenge to central investment propositions or outsourcing arrangements with DFMs. Many of these arrangements have been set up in the past five years and conditions have actually been quite benign for investors across most asset classes, if not quite for the economy as a whole – partly because of what central banks were doing.
We went from markets worrying about the death of capitalism to worrying about things being a bit toppy. Indeed the term ‘tantrum’ is probably quite accurate given the abyss we were looking over seven years ago.
From a broad perspective, it looks as if it makes sense to be defensive, but for how long? We could see Fed tightening, a global panic of sorts, inflation in the UK, and then big political difficulties over the UK’s economic and political status. It could be much more than two years of uncertainty.
That comes with the added challenge of market volatility to drawdown portfolios.
I am aware that there are no answers here. But it may well be time to kick the tyres of your investment processes to see if they are fit for the difficult terrain ahead.
John Lappin writes on industry issues at www.themoneydebate.co.uk
