There are various studies – one a regular one by Ray Dalio when he used to write many of the Bridgewater Associates newsletters, focusing on US elections – that show political decisions, even wars, are not as influential on market directions as normal cycles and animal spirits. Well, maybe this time it really is different.
According to Theodore (Tad) Fetter, a director and head of business development and client service at fixed income manager Brandywine Global Investment Management, there will always be political “bumps” along the way, but the current market risks are a lot more than usual.
For instance, there is the possibility, however likely you rate it, of nuclear war. It’s hard to argue that that is not a significant risk. There are continued major issues in the Middle East, terrorism and, don’t forget, Donald Trump.
Fetter, who will also be addressing the IMCA annual conferences in Sydney and Melbourne, September 19-20, said last week that top-down macro managers, such as Brandywine, spent a lot of time looking at how to avoid the pitfalls of what we had seen in the last couple of years.
“There’s a lot more uncertainty because it is much more likely the risks will become policy driven,” he said. “Perhaps the most difficult risk to judge for fixed income managers is whether there is any evidence of inflation rearing its head and then central banks overreacting to it and putting the recovery in jeopardy… We’ve had a reversal of the secular trend of falling interest rates and we now have to sift through all the information. For the past 20 years fixed income managers managed to an index. It’s not so now.”
It’s not only fixed income managers. In trending markets, which have been the norm for long periods prior to the GFC, and even subsequently, stock pickers are often preferred over top-down managers in being able to provide more reliable alpha.
But there are several things which are highly unusual about the current investment climate, on top of the unpredictable nature of politics. Fetter says: “It reminds me of 04, 05 and 06. People are reaching for yield at the wrong time. Almost every pension fund and asset consultant I speak to have continued to ratchet up [their risk]. So, there’s definitely concerns around high-yield debt, securitised debt and even private debt. We are concentrating on high quality.”
Brandywine will continue to hold some US treasuries, despite their yields and even though it may be against their view on the likely direction of interest rates. “Because of the North Korean situation, that’s why you always want to keep some treasuries,” Fetter says.
– Greg Bright