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Alpha Asset Allocation Review: Trade worries and monetary policy dominate

Central banks forge ahead despite global trade worries
July 12, 2018

Football may not be coming home but The Donald is coming to the UK. The controversial U.S. president whips up indignation amongst the ‘woke’ Liberati and, more seriously for investors, his bombastic approach to trade negotiations threatens to escalate with serious consequences.

America’s long-term geo-political interests have not been served by its consumers being the golden goose and while Mr. Trump’s style is blunt to say the least, seeking some re-calibration of the global order is a reasonable aim. In the short-term, however, the hard-nosed approach may see tit-for-tat tariffs become an all-out trade war, which can only cause economic pain.

It is against this tense backdrop that central banks are embarking on the gradual process of unwinding the biggest monetary policy experiment in history. The United States Federal Reserve has signalled that it expects further interest rate rises this year and it continues to slowly unwind its balance sheet, by not re-investing coupons from bonds it bought during quantitative easing. The European Central Bank remains dovish on rates but has announced it will end QE in December. Even the Bank of Japan has taken tactical opportunities to reduce the pace of its asset buying programme.

Ultimately, a sensible pace of rate increases shouldn’t be bad for the world economy (and is good news for investment returns) but the task of normalisation is hardly helped by the prospects of protectionist measures tipping the world into recession (and in a worst-case scenario creating conditions for stagflation).

The contrast between last year couldn’t be more stark – in 2017 there was a ‘Goldilocks’ environment, where everything was just right in the world economy: co-ordinated and steady global growth, recovering commodity prices and accommodative monetary policy. Now, with the era of low volatility in asset markets at an end, the task of portfolio management is about to get more challenging.

Our Alpha portfolios haven’t altered massively but they are taking a slightly more defensive tone to reflect changing circumstances. Overall, good asset allocation decisions are about ensuring portfolios don’t miss upside and providing defence against the heaviest losses in tougher times. Provided you have a steady and secure income to meet fixed liabilities, and plenty of cash in reserve for emergencies, then the best policy is to stay invested and allow the magic of compounding to deliver inflation-beating returns over the long term.

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