Geopolitics matter but beware of knee-jerk reactions
Asset owners have been notoriously poor at drawing short-term investable insights from political and geopolitical events, but analysing long-term trends can be useful in helping investors prepare for future markets, experts say.
Speaking at the Fiduciary Investors Symposium, Steve McKenna, head of investment advisory at TCorp, said recently the initial reaction in Australia to US President Trump’s election, for example, reflected poorly on the funds management industry.
Markets initially sold off severely, but by the end of the day markets were up again, showing how difficult it can be to translate global political events into investable ideas.
“So we all had the same information in the investment world – we all saw the same things happening at the same time – and our initial collective reaction was to sell the market, and within the space of a few hours it was then to buy the market,” McKenna said. “Then we went on an asset bull run which is only just ending now.”
He said TCorp, the NSW government’s investment manager, has taken some capital out of riskier equities and put it into cash based on a view that the economic cycle is nearing its end.
Less globalisation, less global growth
Allison Hill, QIC’s global multi-asset team’s director of investments, said while it is hard to make asset allocation calls based on geopolitics, the impact of the current global political environment on global growth is something that needs to be factored into economic forecasts.
“One thing I would say about the geopolitical environment or the political environment at the moment is that certainly we are seeing increased levels of protectionism in the trade wars,” Hill said. “We are seeing this nationalism [and] certainly that’s something Trump is espousing. And I think one thing we can conclude is less globalisation is less conducive to global growth.”
QIC views the tariffs the US has imposed on China as likely to have a “relatively modest” impact on growth in both economies, Hill said, taking 50 to 60 basis points off US economic growth and, in Australia, potentially causing a flow-on reduction of about 20 basis points in the economy. But the impact could be worse if the trade war escalates.
A lot hinges on US monetary policy, she said, adding Trump’s rare step of commenting publicly on central bank policy is challenging the Federal Reserve’s independence and could lead to unpredictable outcomes.
“How does [Federal Reserve Chair Jerome Powell] react when he is put under this pressure?” Hill said. “Does he raise regardless of whether he needs to because he wants to be seen to be independent or does he hold back because he feels like he has to because that’s the pressure that’s brought to bear, regardless of the economic data underlying?”
QIC expects a return to more historically normal central bank settings around the world will likely lead to lower rates of return, she said. Asset owners would do well to look at the balance of investments in their portfolio, particularly alternative investments and their degree of correlation to equity markets, she said.
“We’re continuing to look for additional diversifying solutions,” Hill said. “[We are] Increasing our exposure to insurance assets and also alternative or liquid, risk-premia-type solutions.
“And we’ve also continued to actively use short-term dynamic asset allocation to which there’s a valuation-type framework to try and capture some of these returns as that volatility increases.”
Geopolitics matter big time
Mark Rider, ANZ Wealth chief investment officer, said a number of long, secular trends were beginning to reverse with big repercussions for the investment world. For example, globalisation had been a constant trend since the end of World War II and now appeared to be reversing, he said.
Authoritarian governments were gaining power in a world where liberal democracy once seemed an irreversible trend. The US was increasingly departing from its policy since the late 1970s of China engagement, increasingly favouring China containment. The long-running trend of relatively low inflation might also turn, Rider said.
“So all of these forces…when you get all these things turning around the way they are at the moment, it’s going to have an impact,” he said. “And I think this is coming on top of what we’re seeing post the GFC. We have the GFC high debt levels, and we have changing demographics reinforcing a lower real-rate environment. So when I look at it, I say geopolitics and politics matter, and they matter big time.”