DeVere: Robust global market sentiment warrants portfolio diversification

“Strong global market sentiment for risky assets, a weakened dollar and geopolitical turmoil in the Middle East underline the need for a long-term multi-asset portfolio”, an analyst at deVere has stated

DeVere Group’s international investment strategist, Tom Elliot, has commented on the IMF’s decision to upgrade its estimate of global GDP growth this year to 3.9%.

Elliot said: “We have seen an unusually strong start to the year for risk assets, as global investors appear confident that a period of non-inflationary, globally synchronised economic growth is underway.

“Equities and non-core bond markets have benefited from strong inflows in recent weeks, with a slow creep upwards in core government bond yields doing little to deter enthusiasm for risk.

“The MSCI World index of developed market shares is up 7% since the start of January, and up 5.5% in local currency terms. The Japanese economy grew at an annual rate of 1.4% in the third quarter 2017, despite a shrinking population. And the MSCI Emerging Market index is up 9.9% since January.”

Elliot detailed three major theories that are on offer for these developments: “First, the ECB and the Bank of Japan look likely to end their quantitative easing programs earlier than had been anticipated, so bringing forward the date when those central banks might also start to raise interest rates.

“Secondly, Trump’s tax cuts announced in December are worth an estimated $1.5tr over the next five years, at a time when the labour market is already tight. This raises fears of wage inflation pushing up CPI inflation.

“And thirdly, a suspicion by many FX traders that the Trump administration wants a weaker dollar as a deliberate tool for narrowing the trade deficit, to be used alongside more overtly protectionist policies. Trump denied this while in Davos on Thursday, calling for a strong dollar… ‘ultimately’.”

Mr Elliot underlines how Sterling’s strength has contributed to a return on the MSCI U.K. index of -0.2 per cent, as dollar-earning FTSE100 heavyweights have come under pressure, and to a return on the MSCI World index in sterling terms of just 2.0 per cent.

He goes on to say that Trump’s “Make America Great Again” policy poses only a modest attack on free trade, and that it should be contextualised.

He says: “Anything that produces a sudden rise in core government bond yields, or cash rates, are a threat to stock markets and high yield bonds.”

“Meanwhile, geopolitical turmoil in the Middle East should be observed closely”, says deVere’s top analyst.

Elliot comments: “The Middle East is developing new themes that one needs to keep an eye on, partly because of the ongoing risk of a regional clash, but also due to the young populations who are less conservative and less inclined to tolerate the status quo.”

He concludes: “As such, I strongly advise a multi-asset portfolio for the long term to offset financial volatility, centred around 60 per cent global equities and 40 per cent global bonds.

“Such funds predicated on this principle are available in spades and differ according to the level of risk for suitable investors, who more often than not, value certain returns over high-risk gambles.”

ABOUT THE AUTHOR
Christopher Copper-Ind
Christopher Copper-Ind is Editor of International Investment.

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