{"id":65518,"date":"2017-09-11T04:41:00","date_gmt":"2017-09-11T02:41:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/politics-are-not-the-only-risk-on-the-horizon\/"},"modified":"2019-12-31T02:08:36","modified_gmt":"2019-12-31T01:08:36","slug":"politics-are-not-the-only-risk-on-the-horizon","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/politics-are-not-the-only-risk-on-the-horizon\/","title":{"rendered":"Politics are not the only risk on the horizon"},"content":{"rendered":"

As the tenth anniversary of the Global Financial Crisis passed this
\nmonth, our thoughts turned to the ongoing muted volatility in
\nfinancial markets. The \u2018Goldilocks\u2019 conditions of improving growth
\nwithout price pressures are something of a surprise, yet appear to
\nbe increasingly discounted in analysts\u2019 and investors\u2019 expectations.
\nThis situation may appear to be benign, but with valuations across
\nmany asset classes appearing full (not to mention negative term
\npremia in bonds) potential risks are mounting.<\/p>\n

Among the risks we see on the horizon are geo-politics, changes
\nin central bank leadership, taper tantrums, and the dollar and
\nemerging markets.<\/quote><\/p>\n

Political risk remains elevated in the United States, but had also
\nbeen rising in Japan with polls indicating Prime Minister Shinz?
\nAbe was falling out of favour with the Japanese electorate. Japan
\nis a favoured equity allocation across our managed funds, so the
\npossibility of Abe losing his position was of some concern to us.
\nHowever, the panic appears to be over, at least for now. Improved
\neconomic growth data and a less hostile attitude from the public
\nfollowing recent scandals looks to have headed off any political
\ncrisis for Abe. Moreover, two recent cabinet appointments have
\nbeen particularly encouraging, with two potential opponents of
\nAbe given prominent positions within his Liberal Democratic Party,
\nmeaning neither are likely to pose a challenge to the Prime
\nMinister. Our base case is that Abe survives this scare and
\npolitical stability remains until at least 2021.<\/p>\n

A change in central bank leadership could challenge the easy
\nmonetary policy conditions that have underpinned risk assets in
\nrecent years, threatening the \u2018lower for longer\u2019 rate environment.
\nIn Europe, Mario Draghi\u2019s term ends in October 2019, but he
\ncould bid for the Italian leadership next year; while in the US Janet
\nYellen\u2019s tenure ends in January 2018 \u2013 although her position is, to
\na degree, dependent on President Trump. In Japan, Bank of
\nJapan governor Haruhiko Kuroda\u2019s term ends in April and he
\ncould be replaced by a Bank of Japan traditionalist who may be
\nswift to normalise monetary policy. We are mindful that
\naccelerated central bank normalisation could have serious
\nrepercussions for global risk assets.<\/p>\n

Taper tantrums are possible in Europe as the European Central Bank turns less
\naccommodative, especially as the ECB is the marginal buyer of bunds: Mario Draghi has talked
\nof a strengthening and broadening recovery in the euro area and has signalled further tapering
\nof his QE programme as we go into 2018. Ditto with the Fed, where term premia in US rates
\nhas turned negative once again. With share buybacks having slowed dramatically, equities may
\nbe vulnerable \u2013 although we do note that they price in greater risk premia than the likes of
\ncorporate bonds. The dollar has been weak of late, which has helped emerging market rates in
\nparticular and risk assets more broadly. But if the dollar reverses course, there could be
\nmeaningful impacts on other asset markets.<\/p>\n

We have also been looking at the health of emerging markets excluding Asia, where we have a
\nneutral allocation, noting that countries that were hit hard by the taper tantrum of 2013 \u2013 such
\nas Brazil, Mexico, Russia and South Africa \u2013 have undertaken meaningful reforms, with higher
\nquality growth as a result. Russia remains intimately linked to the price of oil, but oil at $50 a
\nbarrel is seen as manageable for both Russia\u2019s economy and oil companies. South Africa is
\nprobably the weakest spot in EM ex-Asia, with soggy growth, growing political risk and low real
\ninterest rates limiting the scope for policy stimulus. While in Mexico, weakness around the US
\nelections provided an opportunity to build into well-supported companies, against a backdrop of
\nstrong consumption prospects that may be helped by policy easing as inflation comes off the
\nboil. Corporate sentiment in Mexico is positive, not withstanding the evolution of US trade policy
\nand timing of further rises in US interest rates.<\/p>\n

Taking all of the above into consideration, we have made no changes to our broad asset
\nallocation this month. However, our global equities team has downgraded three sectors:
\nindustrials and financials have moved to neutral from favour, while technology has moved from
\nstrongly favour to favour.
\nWe remain positive on technology, but the valuations were such that
\nwe felt it was prudent to clip back our exposure to the sector.<\/quote><\/p>\n

Asset allocation snapshot<\/strong>
\n\"l_allocation_d_actifs_en_bref_-_columbia_eng.jpg\"<\/a>
\n