“It’s Too Risky to Invest”
“It’s too risky to invest” was the familiar cry during 2016 as political events such as the Brexit referendum, the Nice attack, the Turkish coup, the US presidential election and the Italian constitutional referendum dominated the headlines.
Despite the negative headlines, 2016 proved to be a positive year as growth in the global economy, and not politics, became the main driver of investment returns.
The start of 2017 has seen this trend continue, with a stronger global economy and increasing inflation expectations providing markets with a positive tailwind. However, risk is inherent in financial markets and should never be ignored. At Appian, we believe in the importance of having a philosophy and process that deals with objectively managing risk, whilst at the same time striving for superior returns.
The three biggest risks that worry global investors today are listed below along with our view:
European Elections raising Disintegration Risk:
The rise in support for euro sceptic parties across Europe is a real worry and is at the front of investors’ minds this year as France, Germany and the Netherlands head into elections. The prospect of a victory by the National Front in France is what markets are most worried about currently. At present this does not seem likely, but given the level of apathy in France driven by high unemployment levels means it cannot be ruled out completely. The only certainty with regard to rising populism within Europe is that it cannot be ignored and should result in a move away from austerity towards more pro-growth expansionary policies.
A Global Trade War:
Fears over a global trade war, have heightened due to the rhetoric emanating from the US administration, since the presidential election in October. Rising protectionism in the US has the potential to slow global growth and needs to be closely monitored.
Rising Bond Yields:
A consensus view is emerging within markets that 2016 has marked the end of a multi-year period of declining long-term interest rates. A continuing rise in inflation across the globe and a tightening of monetary policy in the US have reinforced this view. This brings forward the question as to how far bond prices will fall and at what speed. An orderly rise in bond yields driven by rising economic growth is a different scenario to a rapid rise triggered by concerns over rising debt levels. At the moment, bond yields are rising due to a pick up in economic growth and inflation expectations.
We continue to monitor the risks above, along with others and most importantly as active managers, we stand ready to react when necessary. As John Maynard Keynes said “When the facts change, I change my mind. What do you do, sir?”. Risks in financial markets are constantly changing and as active managers we will change our positioning when we deem it appropriate. What do passive funds do when the facts change?