focus group march 2018 2

We asked a group of 24 pension funds with total assets of €164bn their views on the current risks and opportunities

Monetary policy blunders are the biggest credible threat to the global economy or financial markets in 2018 say a third of respondents to this month’s Focus Group. The likelihood of monetary policy missteps has increased since last year say 61% of participants.

“Given the current condition of the economy, stronger than expected, either a continuation of easy money or excessive tightening could be a problem for the financial markets and the economic cycle as well,” says an Italian fund.

The overheating of the US economy is the biggest threat for a quarter of respondents, while 29% point to the bursting of asset price bubbles fuelled by quantitative easing (QE).

A Dutch fund states: “QE fuels the present bubble. Easing will burst it. That’s a fact.”

Geopolitical tensions were identified as the biggest risk by 38% of respondents in December 2017, while three months later just 8% are of this opinion.

focus group march 2018

Central bank influence is going to continue in 2018 according to 54% of those polled. “As long as they are able to control the power end of the yield curve they are maintaining the most important policy factor,” says a Swiss fund.

Domestic policy rates will be higher than they are today at the end of 2018, but only by 1% or less, say 54% of respondents. “Nominal and inflation rates to steadily pickup, although at a moderate speed and level,” says a Dutch fund.

Domestic yield curve will move very little say 42% of respondents, while 21% expect it to flatten. “Short-term rates will rise more than longer term rates,” says the CIO of a UK fund.

Shorter-term, dynamic asset allocation is irrelevant, distracting or useless in current economic conditions according to over 40% of participants. “Focus on the long-term remains important,” comments a Belgian fund. “Short-term is just noise.”

Correlations between asset classes are more likely to increase in current economic conditions say almost half of respondents. A quarter say they are less likely to increase, with the chairman of a UK fund stating: “All assets are overvalued and they are likely to fall in step”.

Emerging market equities are considered the most fairly valued asset class, with European equities and infrastructure the most undervalued and US equities the most overvalued.

Protecting the downside is an investment priority for 2018 for 54% of those polled. Searching for yield is the priority for 42%; taking advantage of the upside and de-risking for 29% each; and implementing more tactical or dynamic asset allocation for 21%.