There is an inherent danger in talking about complacency because it implies a lack of understanding and can even come across as patronising on our part. Our goal, however, remains simply to try our best to ensure that advisers and clients are aware of our perception of the markets.
How long can the Faangs last?
So far this year, for the best returns investors would have needed to have been in sterling, with an overweight to the US, and within the US to have had most of their exposure to technology companies – overweight in Amazon and Netflix to be precise.
The lack of breadth in these apparently risk-defying US markets should be a real concern for investors on both sides of the pond. A few years ago, there was not much talk of many of the world’s emerging markets decoupling from the developed world, which frankly, turned out to be rubbish.
This time round we hear, anecdotally, of the US standing alone as a continuing bull market, while everyone else flounders. While it is true that the US is more of a closed market (meaning a high degree of self-sufficiency) than many, and it could hold up for longer than others, we believe that in a relatively short order it will be subject to the same pressures and cyclical economic timelines as everyone else, ie the idiosyncrasies of the US stock market will only protect it for so long.
The so called Faang stocks which have been powering this US rally remain largely well supported in this momentum-driven market, but eventually they will be subject to the same economic realities as other companies. In the meantime, the prices get higher and the risk/return profile diminishes, taking with it the risk/return profile for the wider market in the US and globally. The US accounts for more than 60% of the MSCI World index.
The currency effect
The second point we keep banging on about is the currency effect on client returns, adviser remuneration and indeed our remuneration too. In dollar terms and net of fees, a client has probably made close to zero returns. In sterling terms things look a lot better, but it’s difficult to take much credit for our government and the EU’s failure to reach a workable deal on Brexit. It doesn’t really matter whose fault this is as far as the current outcome is concerned, it is just that: an outcome.
One of the biggest dangers for client valuations is sterling’s resurgence and remember that can also mean a renewed fall in the dollar. Trump has recently been implying that he is happy with the stronger dollar but his opinion, as with many subjects and people, can change like the direction of the wind.
Diversification is king
Our portfolios have never been more diversified, including the use of passives, alternative assets, gold, property and funds with the ability to be both long and short stocks. We are also holding more cash than at more or less any previous point in time, as we find the investment case for many areas less compelling than at any time in the last decade.
We are getting similar feedback from some of the managers we use, but perhaps not surprisingly, some will say more to us privately than publicly. We have still yet to hear a manager say, “My sector looks a shocking investment for an investor over the medium term”, so it remains a large part of our job to make these calls instead.
The current market conditions, macro backdrop and the Trump-led retraction of globalisation call for our most diversified investments to date. That said, the ending of this very narrow tech rally or a large move in sterling are highly likely to be the key drivers of client returns, and we all need to keep reminding both them and ourselves of potential outcomes.
Chris Metcalfe is investment director at Iboss