Politics take centre stage for investors’ asset allocation

With interest rates expected to remain low in most developed countries as the battle against deflation continues, larger events can still affect asset allocation decisions at a more micro-level.

Angel Gurría, the secretary-general of the Organisation for Economic Co-Operation and Development, noted at the launch of the latest Going for Growth report that “a return to the pre-crisis growth path remains elusive for a majority of countries”.

He adds: “In most advanced countries, potential growth has been revised down. The revision is particularly large in the euro area, but potential growth remains also weak in Japan. And, even if they do better, other advanced countries also share many of the same challenges: slowing productivity, high long-term unemployment and falling labour force participation. Emerging-market economies resisted better during the crisis, but growth has been less impressive in the last year or two.”

The OECD’s report focuses on the structural policies and reforms that governments can implement to help boost growth, as it warns: “We understand the difficulties many governments in advanced economies face in pushing for reforms in a context of chronic demand shortfalls and limited budgetary leeway. Yet, we see a bigger risk in the slower pace and breadth of reforms.”

But with unpredictable political changes, such as the recent victory of the anti-austerity Syriza party in the Greek elections, the uncertainty surrounding the potential winners of the UK election in May and with a US presidential election scheduled for next year, the political challenges remain a strong headwind.

Meanwhile the monetary policy decisions of central banks around the world continue to make their presence felt on markets, boosting or depressing investor sentiment at various times. As deflation in the eurozone remains a concern, it is widely anticipated that the quantitative easing from the European Central Bank, announced in January, is just the start of a raft of measures, while Japan has already committed to doing whatever it takes to keep the economy ticking over.

On a day-to-day basis, these events do not have a major effect on investors, but in the context of a wider investment universe and in particular how it affects clients’ attitudes to risk, these can have more of an impact than one might realise.

When rebalancing portfolios or selecting an outsourced solution, while the performance and asset allocation are the key components, it is important to ensure these assessments are made in the context of wider events. With such uncertainty and volatility in markets, operating within a silo with no thought of the macroeconomic or political issues could be equally as bad as placing too much reliance on the top down factors.

Nyree Stewart is features editor at Investment Adviser