Politics and policy - positive for portfolio performance
The second quarter of 2017 was all about policy and politics. BlackRock’s Andrew Keegan reviews the quarter and tells IG what this meant for markets and portfolio performance.
In the UK, the general election resulted in a hung parliament, creating uncertainty about the path ahead for Brexit negotiations. Sterling fell, but otherwise the market reaction was fairly muted albeit with some impact on UK domestic stocks. The French election concluded with a decisive win for Emmanuel Macron, which was seen as a positive for Europe and the markets.
In June, the US Federal Reserve raised its target rate for the second time this year by 25 basis points, as expected by the markets. Global financial conditions remain highly accommodative and Andrew Keegan from BlackRock says the Fed’s move made sense, and he believes the US economy ‘will handle this policy transition quite well.’
In contrast, Bank of England (BoE) Governor Mark Carney struck a dovish tone in his June Mansion House speech, arguing against raising UK interest rates. The BoE’s Chief Economist Andy Haldane struck a more hawkish tone and stated the risks of leaving policy tightening too late are rising and that he would consider it prudent to remove some of the monetary policy accommodation going into the second half of this year.
All that has contributed to a broadly positive portfolio performance over the last quarter with equity market returns, particularly US, European and Japanese equities, benefitting the most. Keegan says that BlackRock’s approach to investing overseas by partially hedging currency exposures has been supportive. As sterling strengthens, a UK investor with exposure to overseas assets, such as US equities, may be significantly worse off than a dollar investor. Therefore investing in currency-hedged share classes allows them to reduce some of the risk of underlying currency movements associated with investing in overseas assets.
Given the various political and policy head winds for UK markets and sterling, Keegan says BlackRock has positioned its strategies to be more diversified and defensive across equities, bonds and currencies. And while it remains broadly positive on equities (particularly European including UK) relative to bonds, it has selectively repositioned some exposures into their currency-hedged equivalents to reduce the potential impact from heightened currency volatility.
Keegan also believes that in order to understand the appropriate long-term levels of rates and inflation, policy makers and investors will need to focus on the big picture trends transforming the inflation landscape. Today, massive technological disruptions and long-term demographic trends are remaking the inflation landscape, and he believes both investors and policy makers need to abandon an overly rigid view of the price change.
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