Instead of the extreme bursts of volatility that 2016 delivered after markets failed to account for the Brexit vote, Donald Trump and the defeat of Matteo Renzi’s reforms, 2017 has given us full octane animal spirits that just wouldn’t quit.
The world’s major stock markets continued to outdo their record highs on a monthly, weekly, sometimes even a daily basis. During the last 12 months, the S&P 500 has risen 19%, while the FTSE 100 has shot up 14%.
But with so much good cheer and the Vix stuck at historically low levels for a good portion of the year, investors were plunged into a kind of existential crisis, grappling with questions like “When will the most hated bull market end?” “How long can this go on?”
At this pivotal juncture, the asset allocation team at Brown Shipley is still sticking with the risk-on sentiment that has characterised the investment environment of 2017 on the basis that the global economy isn’t running out of steam just yet.
Across its five risk mandates – cautious, income, balanced, growth and dynamic – the asset allocation team at Brown Shipley has been busy beefing up its global beta exposure, eschewing absolute return products, keeping government bonds neutral to underweight (and short duration) and running 5% cash in most of the funds.
Strong growth looks set to continue
“We’re not yet close to a turning point,” says Smith, who replaced Kevin Doran as chief investment officer at the wealth manager in 2016. “The interesting thing about this global environment is it’s not being driven by one specific region or economy. We’re seeing strong growth numbers everywhere. At the same time, there’s little evidence that this phenomenon, which we’ve seen markedly over the last 12 to 18 months, is coming to an end.”
What Smith is observing is accommodative policies across central banks finally gaining significant traction, providing further support for global growth prospects.
One of the casualties of this diversified global growth will be the dollar, according to Smith, which is one of the reasons the team is currently underweight US equities.
While Smith concedes the dollar remains “a hugely important global currency”, he believes that over time “other non-dollar currency areas will become more attractive to investors”, presenting something of a headwind to the greenback.
Even the euro looks relatively more stable, he argues, as strong economic fundamentals help dilute the remaining political baggage of the Italian banking sector, the German coalition and fallout from the Catalan referendum.
“The dollar typically does well in an environment either of very elevated global risk aversion or an environment where the US is very much in the vanguard of global growth. The fact that global growth is much more diversified now over the medium-term acts as a little bit of a headwind for the currency.
“We’re not hugely negative on the dollar but we think the balance of risks is toward the downside on the medium term.”
