Equities could be the choice in uncertain era
At the beginning of this month, global equities had surged to all-time highs as investors' faith in the US President Trump's promises of boom times remained untrammelled by the lack of detail.
Markets were confident Congressional approval for big spending and tax cuts will be given, and trade-offs will be more than compensated for by economic
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Hide Adgrowth. Indeed, even the US rate increase - the scourge of equities in times past - is being viewed as an indicator of confidence.
A year ago, this would have appeared whimsical, if not outright impossible. Indeed, the next 12 months can, and may well, throw up more surprises that no one sees coming, but will impact portfolios.
These include post-Trump expectations of US growth falling flat. Or we may see a breakout year for the Eurozone where unemployment has finally crossed below 10 per cent. And, whilst the prevailing consensus is that Brexit will take longer, and be tougher, than expected, the pundits could well be wrong again. Europe has huge incentives to treat the UK well in negotiations, and many thorny issues may well be resolved this year.
Further afield, China remains stable, unbelievably so. Fears of an economic implosion rocked markets early last year, but the country remarkably grew at an annualised rate of 6.7 per cent in 2016, a figure some keen observers believe dubious. Many experts expect a day of reckoning to come at some point. It may well be this year.
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Hide AdPollsters, political prognosticators, financial forecasters and average punters are often wrong about many of their expectations. Even if they are right, there is no way to know how markets will react. In 2016, no one saw Brexit or a Republican clean sweep. Even if they had, rational investors would have shorted risk-assets, been long safe-havens or held cash to ride out the ensuring volatility. They would have been wrong.
Equities? Up. US dollar? Stronger. Government bonds? Sold off. Lesson: Trying to define the future is impossible; it may also be useless.
While we recognise a discomforting backdrop to global markets, equities are still our most significant allocation. Why? The asset class appears attractive, not only in comparison to bonds, but also in absolute terms.
Equities offer some value across a number of measures (for example price-to- book ratio). Moreover, equities continue to be supported by strong momentum, and bearish sentiment, both strongly supportive factors in our investment process.
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Hide AdHaving said that, we recognise that markets can move with staggering speed and we continue to have allocations to high quality, investment-grade bonds in spite of record low yields and high valuations. They are held primarily to diversify away from equity risk, and generate some income.
As another form of defence, we have held some cash on portfolios in recent years for two key reasons. First, it gives us a flexible position to capitalise on attractive investment opportunities, and reduces volatility from potential risks of all kinds.
Second, it is a core asset class. It may not generate much in the way of return, but it does not lose nominal value - the most effective form of protection if and when volatility for risk-assets increases.
Following the acquisition of Kleinwort Benson by Societe Generale in summer last year, SGPB Hambros and Kleinwort Benson will be legally merged in 2017 under the name Kleinwort Hambros.
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Hide AdLed by Chris Perkins, Kleinwort Hambros, which is based on the Harewood Estate between Leeds and Harrogate, provides wealth management, fiduciary, investment and financial services planning services for its clients.
It believes that Yorkshire will play a central role in the success of the Northern Powerhouse.