Changes in leadership and the desertion of austerity policies are setting up the market for a period of stronger growth, according to Pictet Asset Management’s Andrew Cole.
Cole – who manages the £138m FP Pictet Multi Asset Portfolio alongside head of multi asset Percival Stanion and senior investment manager Shaniel Ramjee – says the rejection by the electorate of the status quo has led to questions about how economies are managed.
He said: “Eighteen months to two years ago we said that Donald Trump had a much better chance [of winning] than people gave him credit for.
“The referendum in the UK was a close-run thing but in the end the electorate, just about everywhere, were prepared to give the government a kicking after five to seven years of austerity.
“People were thinking, ‘It’s not working for me’. That’s the political backdrop, which in itself doesn’t necessarily move markets.
“We would’ve said a year ago that we think we’re moving into an environment where ‘austerity’ is increasingly a dirty word for politicians to talk about,” added Cole. “Even in Europe there has been slippage in terms of fiscal tightening.”
With populist politicians like Trump and courses of action such as Brexit being preferred, post-financial crisis policies are now being abandoned.
While most governments would describe themselves as pro-growth, opposition towards the low rate environment has grown, says Cole.
Quarterly UK GDP growth since Q4 2006
Source: ONS
The weaker growth of past years has been a particularly sticking point for voters who have increasingly sought out anti-establishment voices.
Cole says an environment of slow interest rate rises and increased growth expectations is to be expected.
The multi-asset specialist says a return to boom and bust is also likely to emerge in the years ahead as the fear of recession has been made less likely.
Election promises by Trump to increase spending on infrastructure and UK politicians preparing to strike new trade deals upon exit from the European Union are positive for the slow growth economies.
“If you don’t have a recession, you kind of need to have a boom first,” he said. “And right now it doesn’t feel like a boom.”
One area of the market likely to benefit from rising interest rates is the banking sector after many years of more stringent regulations following the global financial crisis, he says.
“Banks are the biggest beneficiaries of this. Six months ago, everybody hated them,” he said. “We agree there are still risks [and] banks are going to be less profitable in the next 20 years than in the previous 20 years.”
Performance of banking sector over 10yrs
Source: FE Analytics
Cole says other areas that are likely to benefit from a higher rate environment are sectors with ownership of real asset, such as industrials.
“These are sectors people haven’t wanted to buy in the past seven years,” he said. “In the past seven years the asset management sector has been run from fear rather than greed.”
The manager says the rotation into stocks paying high dividends – so-called ‘bond proxies’ – that are subject to deep fluctuations in earnings.
“Most of these stocks are basically bonds disguised as equities. In an environment where you don’t want to own bonds, why you want to own equities that look like bonds?” he asked.
The question highlights the importance of diversification for multi-asset managers and the need to be more flexible, he says. Since inception the FP Pictet Multi Asset Portfolio has returned 8.84 per cent, compared with a 2.50 per cent return for the average IA Targeted Absolute Return fund and a 7.83 per cent gain for the Libor three month plus 4 per cent benchmark index.
Performance of fund vs sector & benchmark since inception
Source: FE Analytics
“Getting your asset allocation right matters, that’s been true most of the time,” he said.
“In the period of the 1980s and 1990s, equities went up, bonds went up there were very few down years. People didn’t worry about asset allocation,” he said.
“If you look at the preceding 80-90 years of history there were many more down years, bonds and equities quite often go in the opposite direction. The dispersion of returns is much higher.”
Cole added: “We worry about risk a bit to the extent that our portfolio is fairly robust, appropriately diversified.”