Increased volatility is creating opportunities as well as risks. Our updated Ten Themes for 2018 provide insight into the current investment environment.
Varying perceptions of the current market environment are understandable: a number of market positives co-exist with potential negatives. But from our perspective, this is very much a glass half full – not half empty.
“Higher volatility will generate risks – but also opportunities”
Recent market moves represent a shift back to a more typical market environment – with higher volatility generating risks but also a range of opportunities. This shift is inevitable as we move slowly towards the end of the post-global financial crisis quantitative easing process, and the suppression of asset class volatility that this implied.
Trade disputes and other factors cast a long shadow, but it is difficult to get too depressed against a background of strong economic data, particularly in the U.S., and continued corporate earnings growth.
“Forewarned is forearmed: think ahead”
Optimism must not result in complacency. In this report, we update our Ten Themes for 2018, first published last December. As the first of these states: “Forewarned is forearmed”. We had warned that then-low levels of volatility were unlikely to be sustained and suggested that investors should think about reconfiguring portfolios in anticipation of increases. We continue to think that selectivity, active management and, in particular, risk management will be important in navigating the current environment.
“Explore investment alternatives”
Within our Ten Themes for 2018 we also look at why economic growth will surmount geopolitics and how central banks will manage the policy transition. Our call to be cautious and selective on fixed income has been borne out by recent market movements, and we still think there is room for modest equity gains. Given expectations of more modest returns in conventional asset classes, however, we suggest exploring investment alternatives and also think that it’s worth being aware of the multiple factors driving exchange rates. Long-term investment themes (now including AI and smart mobility) could be an important contributor to portfolios.
We support our Ten Themes for 2018 with separate macroeconomic and asset class analysis and forecasts. On the macroeconomic side, there remain political and policy risks, but we see sunshine behind the clouds – with solid growth rates and inflation kept well under control. And for multi-asset investors, lower likely investment returns – in both equities and fixed income – continues to support the case for active risk-taking and active risk management.
In summary, a year where getting the right perspective is particularly important: see a glass half full.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Edited from CIO Insights Q2, produced in April 2018.