Nine wealth managers reveal their biggest worries
Multi-asset investment manager, Coutts & Co, London
Central banks running down bond inventories, ie reversing quantitative easing. The Federal Reserve (Fed) bought $4.5 trillion (£3.4 trillion) bonds in the six years following the financial crisis, and the European Central Bank (ECB) is still buying bonds.
Given that central bank asset buying was partially responsible for higher prices, any hint of a policy reversal could hit markets if not signalled and explained well in advance.
Brexit uncertainty. Despite the lack of a noticeable impact from the referendum result, businesses and markets dislike uncertainty and may hold off key investment and expenditure decisions.
US tax reform. While the near-term debt ceiling limit has been raised, it will come back into play when interest shifts to tax reform. Through the year, the market has progressively lost faith in president Donald Trump’s reflationary proposals and so an unexpected victory on tax reform would likely shift market valuations.
Investment manager, Mattioli Woods, Glasgow
At present, the most worrying news is clearly geopolitical and concerns over the nuclear capability of North Korea. While there is a fair amount of sabre rattling, the possibility of war between the US and North Korea cannot be dismissed, and loss of life could be high. Markets have been reasonably sanguine thus far and we are watching the situation closely.
There are numerous other issues to be worked through in the coming months. Despite a number of political setbacks and elevated valuations, the short-term worry for the US market is surely the requirement for Congress to raise the debt ceiling by October. It needs to go above the current $19.8 trillion level to allow the economy to function and avoid default.
The UK (and Europe to a degree) have Brexit negotiations to move forward on, and both David Davis and Michel Barnier have a lot to discuss throughout this year and next. This, of course, has an effect on currency, which again is a concern given the weakness of sterling and the strength of the euro since the start of this year.
Director, Barclays Wealth & Investments, Edinburgh
The main risk that we’ve always highlighted to clients is that of a US recession. As the world’s largest economy, the US is the main driver of the global business cycle. If the US were to fall into a severe recession, the global economy would not be far behind. So far, lead indicators for the US economy still indicate decent growth prospects.
With the US labour market continuing to tighten under historically loose monetary policy, there is a risk for inflationary pressures to rise faster than policymakers anticipate. In such a scenario, the Fed would likely drive up interest rates to avoid falling further behind the curve, possibly causing the multi-decade bond bull market to unwind chaotically.
A hard landing of the Chinese economy is something we are continuously on the lookout for. The extraordinarily rapid rise of debt in China, particularly in the corporate sector, has given rise to fears that the country may be long overdue a banking crisis. Historically, countries that have experienced rapid debt growth of such magnitudes tend to end up with some sort of financial crisis.
Macro-economist & investment analyst, EQ Investors, London
Further steps towards an end to ultra-easy monetary policy could increase volatility. While markets have taken US rate hikes well, if either the Fed or the ECB surprise investors, we could see adverse market moves.
Markets are pricing just a 36% chance of another US rate hike in 2017. This feels low, given that the US economy appears to be regaining strength and financial conditions have actually loosened over the year. A more hawkish than anticipated Fed combined with extreme short dollar positioning could spark a dollar rally before the year’s end. This could spell trouble for US equities which have been driven by the strong performance of exporters.
European growth has substantially improved but inflation remains weak. This leaves ECB president Mario Draghi with a difficult balancing act; slow asset purchases at the risk of dampening already subdued inflation, or let growth accelerate even further. Assuming Draghi sticks to the ECBs forward guidance, and avoids damaging his credibility, we expect the ECB to exit QE without difficulties.
Chief executive, Armstrong Investment Managers, London
On the surface the global economy has been expanding in a well-tuned fashion with strong export orders and trade growth, but political pressures with the US elections and North Korea have been on the rise. China is the biggest trading partner and main provider of food and energy for North Korea. Although China expressed its disagreement with the North Korean missile programme, China has resisted implementation of stronger measures against North Korea. The question is if this is just the beginning of the new cold war, but this time between the US and China.
Investment manager, Redmayne Bentley, Exeter
The background to the global economy continues to be dominated by geopolitical issues, with North Korea’s missile threat a focus of current concerns. Hopefully diplomatic pressure proves successful in diffusing the serious tensions involving South Korea, Japan and the USA. Ongoing Brexit negotiations with EU Brexit negotiator Michel Barnier have seen major differences between UK and EU aspirations eclipsing any common ground.
In the US, earlier enthusiasm for president Donald Trump’s economic plans has faltered, partly reflecting the political difficulties faced by the attempted repeal of Obamacare, which was not passed. Infrastructure spending intentions are quite slow to materialise and it is unclear if congress will support plans for construction of a wall along the Mexican border.
Immediate challenges include the need for politicians to approve a budget and increase the government debt ceiling in December, to avoid the US defaulting on its debt.
Chief investment officer, Cannacord Genuity Wealth Management, London
Global economic growth is more synchronised today than at any point since the financial crisis. The market has dubbed this period ‘Goldilocks’—so what can go wrong?
Obviously, there are geopolitical issues. A Korean conflagration would scupper everything, but even the economic consequences of additional tension would stop the feel-good factor. A trade war between the US and China, ostensibly to stop support for North Korea, would rattle the world economy. Likewise, President Trump unilaterally exiting NAFTA would send markets into a spin. Indeed, the White House is probably the kernel of most market concerns.
Chief investment officer, Heptagon Capital, London
We have reached the stage of the cycle when even some respected investors have started to say that ‘things might be different’ this time around.
While it may be true that the merry-go-round of lower bond yields boosting global asset prices can run for longer, especially given the current lack of inflation, it would be foolish to think that central banks have succeeded in banishing the business cycle forever.
For the patient investor, now may not be a bad time to build some cash reserves, since we find that many pockets of the investment landscape are expensive. We believe that investing in ‘value’ as a style makes sense in the current environment, as well as a decent allocation to emerging market assets.
Furthermore we favour an allocation to uncorrelated private market strategies, which look to us better value than traditional assets today.
EMEA investment strategist, Citi Private Bank, London
As the European economic cycle moves into a more mature phase, it will be important to carefully monitor two domestic factors in particular.
Firstly, to what extent and at what speed will the central banks withdraw liquidity. This is particularly important for fixed income, where valuations are not cheap, partly due to central bank buy programmes in sovereign and investment grade corporate bonds. We expect tapering to be gradual, and do not expect a rates rise in either Europe or the UK for many months.
Secondly, as European market multiples are not expected to expand further, earnings need to keep progressing if equities are to progress further. We expect strong mid-teens average earnings growth over the next 12 months; however, we are also expecting more earnings dispersion and an increasing need for more sector, stock and theme selectivity.