Diversification can certainly combat complacency

Investment strategy - 3/13/2017

As Donald Trump announces that “America is once again ready to lead”, most commentators will agree that the new President, and his reflationary rhetoric, are already leading at least equity markets higher. Despite the seemingly ever-present threats from European politics and upcoming elections, bourses in Europe are generally in a bullish mode, albeit not keeping pace with their US counterparts. Emerging markets seem to be enjoying a “Goldilocks” US dollar, ie not too hot/strong, not too cold/weak, and for the time being an initial bond market sell-off, has not yet turned into a rout.
It’s during times when bull markets are giving investors a warm cosy feeling that we should guard against complacency. Diversification can certainly combat complacency.

With markets definitely in an optimistic mood, and having rallied almost in a straight line since the US election, it is natural to expect a pullback and any Trump disappointments have the potential to deliver a nasty shock to overconfident and overexposed investors. However, shocks can originate not just from the “usual suspects” but from unexpected and sometimes forgotten sources.

“Dancing on the Ceiling”, an absolute classic hit song from Lionel Richie released back in 1986, serves as a useful reminder as to an upcoming event in March when US national debt is expected to top $20 trillion. As a reminder, the resetting of the US debt ceiling to $18 trillion had already caused consternation and even doomsday predictions back in 2015.

Whilst our economics team thinks there may be some dancing around the issues of raising the US debt ceiling, ultimately they believe an agreement will be reached. That said, the lead up to any agreement may be accompanied by significant swings in volatility and certainly be prepared for a jump in presidential tweets. It’s during times when bull markets are giving investors a warm cosy feeling that we should guard against complacency, as bears don’t stay in hibernation for too long and even if they just wake up, peer out of their caves and yawn, it can be a frightening experience. Diversification can certainly combat complacency but in addition, all investors should systematically review their portfolio returns against their long-term objectives.

The 4 main points covered by this latest edition:

  • Financial markets remain optimistic and healthy
  • Base inflation will fluctuate between 2.1% and 2.3% in the first half of the year
  • The US dollar is the adjustment factor to monitor
  • We maintain our allocation unchanged, but remain vigilant


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