The benign economic and market landscape carries on regardless, an observation we have been making for some time.
Global growth continues in a not too hot, not too cold fashion and this is translating into higher asset prices and conspicuously low levels of volatility; all of which are aided by high levels of central bank liquidity.
However, the longer this cycle persists – and we are in the ninth year of the so-called ‘bull market’ – the more we expect investors’ complacency to be juxtaposed against an ominous feeling that these apparent ‘goldilocks’ conditions cannot persist forever.
Sterling investors, more than their overseas counterparts, have already started to feel some pressure through the UK currency’s strength in recent weeks, triggered by Bank of England oscillations around the near term interest rate outlook.
Despite sterling’s rebound, we remain underweight in UK assets amid Brexit uncertainty, less stable domestic politics and fiscal imbalances.
Outside of the UK, for much of this year global investors have dismissed the idea that central banks will tighten monetary policy. Inflation has not behaved as policymakers have expected, and factors such as ageing demographics and technology have been blamed. We have not entirely agreed with this assessment.
The environment is changing to one of tighter financial conditions globally; a prospect that investors have yet to fully embrace.Instead, we have held the view that inflation is a lagging indicator and before long it will pick-up, reflecting the economic rebound seen over the past year. Furthermore, central banks are not solely focused on inflation targets; they are also concerned about financial stability.
Indeed, against the backdrop of rising asset prices and worries about income inequalities giving rise to populist politics, there has been tacit
recognition from policymakers about the harmful effects of emergency levels of stimulus in the long term.
None of this suggests that something sinister looms on the horizon. We do believe, though, that the environment is changing to one of tighter financial conditions globally; a prospect that investors have yet to fully embrace. So while it is important to keep participating in rising markets from a risk/reward perspective, we believe gradually reducing risk in portfolios is appropriate at the moment.
Since June, we have been recalibrating portfolios and building defences so that they can better withstand any potential market dislocation. We have reduced our less liquid exposures in property, as well as taken profits in some areas that have performed strongly this year, such as European equities and emerging market sovereign debt.
Our underweight duration exposure in bond markets is long standing and an appropriate stance considering we expect a back-up in yields. In equities, we are maintaining a targeted approach in sectors that offer compelling long-term secular opportunities, irrespective of the economic cycle.
We retain high cash levels and, over the last year, have looked to diversify return streams across a blend of alternative assets, as well as having exposure to gold.
In a world where there are many moving pieces - central bank tightening, heightened geopolitical tensions and whether Donald Trump can implement his tax cutting agenda - we have positioned portfolios to respond appropriately to the shifting sands of macroeconomic developments.
Noland Carter is chief investment officer and head of Heartwood Investment Management
