There are currently three known risks to global markets which Royal London Asset Management’s Trevor Greetham is keeping an eye on – Trade wars and Donald Trump, the Middle East and oil shocks and Brexit – and one unknown risk – the Wuhan coronavirus.
On Trump and trade, the RLAM head of multi-asset said investors shouldn’t allow themselves to believe that the recent détente between the US and China means that tariff threats have dissipated.
“We're often saying to ourselves, ‘what’s Trump going to do between now and November’s election’,” Greetham said.
“We end up split between people who think that Trump is now going to quieten down and behave himself – because he wants the economy and the stock markets to recover into November and that's the best thing he can do to improve his approval rating.
“And the other people say ‘get real, we’re talking about Donald Trump, he's not going to quieten down’,” especially when it comes to tariffs.”
The multi-asset manager said there is a danger that the US president becomes “noisier” and ramps up his trade crusade by going after European car manufacturers or demanding face-to-face negotiations with China.
“So, this is really very much a live issue in our weekly discussions,” Greetham said.
Another known risk is the recent increase in tensions in the Middle East particularly because of the potential for an oil price shock, which have preceded every US recession.
Source: RLAM
“In my lifetime, every single recession in the US economy has either been caused by or worsened by an oil shock,” explained Greetham. “And all but one of those was a war.”
Tensions increased in January over the killing of Iranian general Qassem Suleimani by a US airstrike resulting in an oil price spike.
However, Greetham doesn’t think that this is likely to signal a recession because the current US bull market expansion – now the longest in economic history – is expected to continue.
The final known risk is closer to home and concerns is Brexit, or more specifically the “honeymoon period” that investors have been lulled into since the December general election.
The landslide election victory for the Conservative party and its ‘get Brexit done’ mantra has seen some of the previous uncertainty removed and business and consumer confidence restored somewhat.
As such UK stocks rallied in the immediate aftermath of the election, which Greetham said he had partaken in and increased the weighting of UK stocks in the Royal London Multi Asset Strategies fund to a less severe underweight.
The positive impact of the election result on sterling has also been undeniable and is currently “defying gravity”, according to the multi-asset manager.
Sterling versus the dollar and euro
Source: RLAM
However, despite having taken the UK out of the EU since the election, prime minister Boris Johnson faces a very narrow window in which to negotiate a new trade agreement with the 27-member bloc, which could lead to greater uncertainty for the UK economy.
As such, Greetham believes the UK prime minister could be tempted to use fiscal policy to help lessen the economic impact from the trade negotiations.
“We think we're in this honeymoon period where actually policy could be quite forcefully applied to try and smooth through Brexit and the economic impact,” he said.
“We think this risk will come back and will affect sterling and will be something people get more concerned about. I think we're in a kind of honeymoon period going on between the election and the budget.”
Greetham’s comments came prior to the resignation of Chancellor of the Exchequer Sajid Javid last week, which could now be delayed and will likely look different from what Javid had planned.
“Once we get past that budget, all the markets have got to look forward to is the details of the trade negotiation,” said Greetham.
“There's a kind of almost a honeymoon period here, but it might not last that long. And after the budget, it could get quite sticky again,” Greetham said.
These were all known risks, but markets were hit unexpectedly earlier this year by something they had never factored in: the Wuhan coronavirus outbreak.
Greetham’s colleague Melanie Baker – senior economist at RLAM – said while the impact of the virus could be substantial but temporary, mainly affecting global supply chains.
“Most of us are not expert epidemiologists, there's a natural increase in uncertainty that follows from events like this,” she said. “The coronavirus is one of those classic unknown unknowns.
“A month ago, we'd have talked about the other three things – trade, Brexit and the Middle East – and we wouldn't talk about coronavirus,” Baker added. “So, maybe there's number five on our list, which we just don't know about yet.
“Markets are really, really bad at factoring in these very unknown unquantifiable risks. Obviously, there's a different scenario, some of which would be severely bad for the world economy and therefore, severely bad for financial markets.”
Nevertheless, Baker said they do not think the coronavirus will derail the business cycle, although “it might delay the recovery a little bit”.
All of this has made Greetham shift some of his portfolio allocations.
The multi-asset head said he remains overweight stocks broadly, adding even more to it at the start of 2020 but is holding back on some equity exposure due to the ‘Trump tweet danger zone’.
“Immediately after he tweets about the new time all-time high in the stock market within a week he's often done something,” he explained. “It's almost like he thinks ‘Okay, if the stock market’s at an all-time high, I can't be doing any damage. Let's threaten tariffs on Mexico’.
“So that holds us back from being as positive as otherwise we would be.”
With respect to the coronavirus, Greetham has increased emerging markets exposure as he believes they will bounce back once it is brought under control.
From a sector perspective, the manager said he was overweight technology although he warned that markets were in the “foothills of another dotcom bubble”.
He said it was reminiscent of the 1990s because of the long disinflationary expansion and the strength of the sector.
“By the foothills I mean technology has been a massively strong performer for the last sort of five years but it's been [based] on earnings,” he said. “They haven't seen the same crazy multiple expansion, as you saw in the late 1990s. So that could go further.”
Greetham’s £196.4m Royal London Multi Asset Strategies fund has made a 7 per cent total return since launch in 2018.
Performance of fund since launch
Source: FE Analytics
The fund has a yield of 1.36 per cent and an ongoing charges figure (OCF) of 0.55 per cent.