Chris Metcalfe: The confusing paradox created by Trump and Brexit

Certain geopolitical events have positively affected clients’ bottom line

Iboss' Metcalfe: How I reinvented the wheel

Working with more than 60 adviser firms across the UK gives us at Iboss an interesting insight into how their underlying clients are thinking about markets and macro risks.

Every quarter we look to identify themes and patterns in advisers’ client comments via the communication we provide. In the last two quarters of 2018, the words “Brexit” and “Trump” dominated feedback, while in September those expressing a fear of missing out (Fomo) reached peak level.

As an example, one client recently pointed out that the FTSE 100 had “not appreciated during the last year” but hoped that “this [situation] will improve when both the Brexit and Trump problems disappear”.

Confusing paradox 

It remains a somewhat confusing paradox for many clients that, while the mainstream media is often full of doom and gloom surrounding Brexit, the fall in sterling in the immediate aftermath of the vote was, in almost every case, positive for their portfolios. In addition, although we find the merits of Trump’s tax cut questionable given the economy was so strong at the time, in the shorter term at least it had the effect of boosting global equity markets.

So, while the longer-term economic effects of Brexit and to some extent Trump remain largely unquantifiable, it can be argued that from a pure valuation perspective, so far at least, they have positively affected the client’s bottom line. Again, we know from client feedback that many clients now understand this, but we are still receiving questions from newer clients along the same lines.

To finish on the Brexit paradox, if the markets perceive the eventual Brexit outcome to be good for sterling, then client valuations would likely fall in the short term as sterling would appreciate against both the dollar and the euro.

From Fomo to just fear

What we are currently witnessing is a distinct change in client commentary, from Fomo to a greater concern for the market falls sustained throughout the fourth quarter. In February, we have also experienced a probable record number of requests for meetings with their adviser from the clients. This would also seem to reflect growing client concern with the Brexit news being particularly prominent as various redlines get crossed and deadlines extended.

We have also noticed, going back to before the global financial crisis to the current day, that it’s when markets are less stable that clients make more of their own investment suggestions, and often it’s around property.

Again, it’s slightly ironic that as some clients want to increase their property exposure, we have simultaneously  reduced exposure to the lowest on record within the Iboss investments. We have also extended the property definition to once again include infrastructure, which is often one of the few areas which carries the support of governments and opposition parties alike, with the US being a good example.

The period we entered into in October 2018 is likely to sustain for a considerable time as global central banks enter a prolonged period of head scratching and searching for the answers to a post-QE world with falling growth and political uncertainty.

Effective communication will be essential as advisers and clients alike have to navigate this challenging investment environment. At some point, the fear of missing out will usurp the fear of market falls, and we will be sure to make our advisers aware of what the clients are saying to us when this time comes.

Chris Metcalfe is investment director at Iboss Asset Management

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