Talking Point  

Middle East unrest and weak US dollar will drive multi-asset

Middle East unrest and weak US dollar will drive multi-asset

Continued uncertainty in the Middle East is increasing the risk of a regional crash, leading one global analyst to urge clients to diversify through multi-asset portfolios.

Tom Elliot, international investment strategist for the DeVere Group, said a combination of strong global market sentiment for risky assets, a weakened dollar and geopolitical turmoil in the Middle East have "underlined the need for a long-term multi-asset portfolio".

While the year has seen strong investor appetite for risk assets, with global stock markets still showing great strength and the International Monetary Fund upgrading its global GDP estimate to 3.9 per cent, he said investors should still take note of potential pockets of weakness and diversify their strategies.

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Mr Elliot said: "The Middle East is developing new themes that one needs to keep an eye on, partly because of the ongoing risk of a regional clash, but also due to the young populations who are less conservative and less inclined to tolerate the status quo."

Moreover, he is concerned about the potential effect the unwinding of monetary policy might have on global markets. 

He said: "Firstly, the European Central Bank (ECB) and the Bank of Japan look likely to end their quantitative easing programmes earlier than had been anticipated, so bringing forward the date when those central banks might also start to raise interest rates.

"Secondly, Trump's tax cuts announced in December are worth an estimated $1.5trn (£1.06trn) over the next five years, at a time when the labour market is already tight. This raises fears of wage inflation pushing up CPI inflation.

"And thirdly, a suspicion by many FX traders the [President Donald] Trump administration wants a weaker dollar as a deliberate tool for narrowing the trade deficit, to be used alongside more overtly protectionist policies.

"Mr Trump denied this while in Davos on Thursday, calling for a strong dollar 'ultimately'."

As a result, he warned that central bank policy errors still remain a "key risk" to capital markets, adding: "Anything that produces a sudden rise in core government bond yields, or cash rates, are a threat to stock markets and high yield bonds.”

As a result, he said he would "strongly advise" a multi-asset portfolio for the long term to offset financial volatility, centred around 60 per cent global equities and 40 per cent global bonds.

He said: "Such funds predicated on this principle are available in spades and differ according to the level of risk for suitable investors, who more often than not, value certain returns over high-risk gambles."

Jerome Teiletche, head of cross-asset solutions at fund manager Unigestion, said while the team's positioning still favours growth assets, they are also keeping a close eye on how monetary policy might affect global growth.

He said: "We are preparing the portfolio for higher inflation expectations for more than one year now.

"From our standpoint, the major risk is a stronger normalisation of monetary policy than what the market is currently expecting.