Archived News 28/08/2017
10 Years on and still not out of the woods
Is it really ten years already...? Ten years on from the start of the great recession global financial markets find themselves venturing into the unknown...
Ultra-low interest rates and unprecedented levels of quantitative easing have been a feature of central bank policy for so long that markets have been conditioned into a sense of this being the norm. History and conventional economics tell us that this is not normal, the challenge ahead is surely one of figuring out how to wean the global economy off this stimulus without damaging the recovery and possibly sending markets downward again in a fashion reminiscent of that witnessed during 2007 to 2009.
Can I get a pay rise please...?
Geopolitical tensions and political idiosyncrasies aside, the global economy is generally in a pretty happy place at the moment. GDP growth remains at a heathy level, asset values continue to grow and employment levels are, in many countries, at or near historic highs. Surprisingly, however, despite the tightness in labour markets, wage inflation has remained relatively muted. Likewise, price inflation in general, almost everywhere, is missing. The result is one where central banks are being afforded the time to transition away from monetary stimulus in a controlled fashion rather than being pressured to act hastily in fear of inflation getting ahead of itself causing an overheated economy. Instead we have a goldilocks scenario – not too hot and not too cold – where economic growth remains positive but modest, and inflation - including wages - remains controlled. So long as this situation persists it is likely that risk assets will continue to perform well.
Beware the calm before the storm...
Market volatility levels have been tracking at lowly levels for some time, suggesting that there may be a complacency with regards to what might be lurking around the corner. Having come through the majority of the second quarter reporting season it is true that corporate earnings growth has been strong, however, share prices have not reacted as positively as one would expect. This points towards the lofty equity valuations prevalent in today’s market and the reality that there is a great deal of positive news already ‘priced in’. The goldilocks scenario could change with little warning. Elsewhere, China has seen an unsustainable explosion of debt in recent years and is now battling to gain control of the situation whilst being mindful of not causing significant damage to the real economy. This is a challenge that they will do very well to meet.
Unconstrained and diversified
The investment managers at Cornelian are not tied to a pre-determined strategic asset allocation nor do we have any fixed or minimum allocations to any one asset class. Our only constraint is a mandated upper expected risk limit per fund to ensure each portfolio cannot exceed investors’ risk tolerance. Our differentiated investment approach means that we have the freedom to de-risk our portfolios whenever we deem it prudent to do so.
In today's environment, it is crucial to have the flexibility and confidence to avoid taking risks that are blatantly not rewarded.In today's environment, it is crucial to have the flexibility and confidence to avoid taking risks that are blatantly not rewarded. At Cornelian, we have been increasing our exposure to ultra-short investment grade corporate debt which offers a significant yield pick-up versus money market instruments whilst avoiding the skewed downside risk that more traditional longer dated bonds currently offer.
Senior Investment Manager