US inflation was lacklustre in 2017, despite falling unemployment. This combination was very supportive for equities. In 2018, a key risk is that we see a similar wage pick-up in the US to what we’ve already seen in Central and Eastern Europe, where labour markets are also tight. As a result, we believe there are potential benefits in holding US dollar and US inflation exposure in portfolios to help mitigate the risk of higher interest rates undermining equities and other risk assets.
‘Less is more!’ That is what correlation wants to brag about to enhance diversification. However, following the financial crisis, many believe that correlations are at an all-time high – is this the end of low correlations? We think not.
History is littered with episodes where the rules of economics were declared dead, only for these rules to return with a vengeance. You remember the ‘end of the business cycle’ debate in the late 90s or the ‘great moderation’ paradigm of the early 00s? Despite these precedents and despite overwhelming evidence that large debt build-ups can end in tears, we believe a Chinese financial crisis is not that likely over the next 2-3 years.
A great advantage in managing money is having the ability to wait: avoiding a situation where you have to invest. This means you can pass on an investment idea simply because it doesn’t look interesting enough and wait for truly great opportunities. American baseball fans call this “waiting for the fat pitch”.
In my recent post The future ain’t what it used to be, I talked about the importance of looking ahead for scenarios that could affect our portfolios, and assessing what impact they might have. 2017 is littered with potential event risks; here we look at the 'unlucky 13', with European politics taking centre stage.