While the rest of us are having nightmares about ghosts, witches and Brexit, investment professionals have other things on their mind. We asked top fund managers what is spooking them this Halloween.
Simon Edelsten, co-manager of the Mid Wynd International Investment Trust is terrified about trade wars
“I’ve been having nightmares ever since I saw a video of the recent speech by US vice president Mike Pence at the Hudson Institute. Two things worry me: firstly, that he may be even more nuts than President Donald Trump, and secondly that the pair are escalating trade tariff problems with China.
“The scale of political rhetoric at the moment is reminiscent of the Cold War. We’re analysing the stocks we hold to ensure we’re doing everything we can to protect the fund from the long-term repercussions of a worsening US-China relationship. It’s a proper horror movie.”
James Horniman, portfolio manager at James Hambro & Partners is finding the lack of treats tricky
“The thing frightening me most is that there are no more treats left in the bag. Over the past 10 years, quantitative easing has driven up asset prices while record low interest rates mean people have got used to living on debt, and now Trump is giving away tax breaks to US companies to boost an economy that was already picking up nicely.
“There comes a point where investors have to ask how much return is left in the markets, and do the risks justify those returns? We’re monitoring valuations closely and holding record levels of cash in client portfolios.”
Bill Dining, head of investment strategy at Waverton Investment Management is petrified of populism
“Brexit, the elections of President Trump and of the Italian government are all rejections of a status quo. The main cause of all these things is that people feel poorer. In the UK, between 2006 and 2016 real wages fell the most of any 10-year period since the 1860s, while Italian GDP per capita is up just 1% since the introduction of the euro nearly 20 years ago. The populist response to these problems could themselves cause greater issues: trade wars that hurt growth and the people they are designed to help, for example. Investing around these things is very difficult.”
Jeremy Podger, portfolio manager on the Fidelity Global Special Situations fund, is panicked about profits
“There have been some telling profit warnings in recent weeks that have highlighted some growing challenges for companies. Take, for example, the recent comments by US industrial paints and coatings firm PPG: it cited issues with demand in China and from auto companies, as well as increases in prices and logistics costs.
“On top of that, it noted a general reluctance from customers to pay higher prices to offset these cost pressures. The coming earnings results seasons will add more colour to this picture and point to those areas where, for now at least, profit margins may have peaked.”
Ben Kumar, investment manager at Seven Investment Manager, is chilled by yields
“Fixed income is one of the biggest risks to capital at the moment, which is a particular concern as it often makes up 50% or more of a cautious investor’s portfolio. That means, in seeking to avoid equity market volatility cautious investors may actually be taking a far greater unseen risk. The maths is simple and inescapable: a 1% rise in the yield of a 10-year bond results in roughly a 10% loss of capital.
“If an investor has half of their portfolio in such bonds, the other half has to generate a return of 10% just to break even. If an investor has 70% of their portfolio in fixed income, bonds only need to lose 5% before the remaining 30% of their assets needs to deliver a return of more than 10% in order to break even. Equity markets do have the capability to generate those returns over the long-term, but they can’t be relied upon to do it in any given year.”
Mark Munro, manager of the Aberdeen Standard Investments Total Return fund, is worried about world growth
“In our lifetimes, we are all using to increasing globalisation and freedom of trade so it’s difficult to assess how this change – with trade wars between the US and China – will play out. Strategists estimate that if a 25% tariff is applied on all goods, by all economies, it will hit global GDP by between 1.5% and 3%.
“If the scenario remains to be between the US and China then only around 4% of global trade is impacted and it’s a smaller hit to global growth. We are vigilant to stocks that may be impacted by further trade tensions. Any ratcheting up of trade rhetoric will likely lead to a strong US dollar and that environment, year to date, has not been overly helpful for risk assets.”
