Politics, policy and (market) peaks
2018 outlook (part 1)
While our forecasts for 2018 follow a similar trajectory to 2017, a healthy dose of potential risk lurks in the shadows. For a different take on the Asset Allocation team’s outlook for next year, here’s an insight into the regular debate at our team meetings in the first of a three-part series focusing on our discussions on each of the three Ps of politics, policy and (market) peaks.
Political tensions to keep an eye on
Emiel: We anticipated last year that geopolitics and protectionism would be the key drivers of risk in markets during 2017; in the end that didn't really materialise: how will this develop in 2018?
Tim D: There’s still much to worry about in 2018. Our more immediate concern is President Trump could still pivot towards a more protectionist agenda with NAFTA renegotiations. Conflict in Asia or the Middle East could also shatter the benign macro backdrop.
Simone: I agree, and these kinds of scenarios continue to be part of our risk assessment. It was interesting that in 2017 despite all the political uncertainty, volatility across asset classes continued to drift lower. Though history suggests that low-volatility regimes are persistent, an unexpected pick-up in volatility due to an unforeseen geopolitical event could cause significant disruption.
Hetal: In Europe there is also some lingering political uncertainty, though this could be less acute than this year. The Italian election, due by May, is likely to be the most significant risk-event, but we think the risk of an anti-euro M5S government is limited. The aftermath of the Catalonia elections will also bear close scrutiny.
Emiel: As you know I feel more comfortable when we have aimed to prepare portfolios for some of these unpredictable events. At the moment no one is particularly worried about any of the obvious geopolitical risks, so this is typically the time to take out some insurance.
Emiel: Next year is set to be packed with elections in the emerging world. Magda, is there anything to be concerned about in your markets?
Magda: I’ll be keeping a close eye on the electoral contests in South Africa where the new ANC leadership could bring about a change in policy agenda and sentiment, which would be a positive outcome for the economy.
In Brazil, the elections may reaffirm support for the reformers, but the lengthy election campaign may delay the necessary and crucial adjustments in fiscal policy and the social security system.
Emiel: That seems like business as usual for emerging markets, and given that it’s such a diverse universe, there will always be risk and opportunities for investors to anticipate somewhere.
Overall I believe that geopolitics will remain very relevant for markets. In a change from what has been the case for most of 2017, investors are currently not paying enough attention to the risks we have in geopolitics. It’s at times when few people are worried and most people focus on opportunities rather than risk that we should increase our hedges in the portfolios.
To hear more from the team in our live webinar please click attend below. If you have any specific questions we encourage you to email them to [email protected].