Investors should stay focussed on their long-term goals as political events and ensuing market effects are very difficult to predict, asset manager Vanguard has argued.
Speaking during a conference hosted by IPE Dutch sister publication Pensioen Pro, Peter Westaway, chief economist and head of investment strategy in Europe, emphasised that investors should ignore the temptation of making radical course changes.
He pointed out that the UK’s economy has been increasing 2% since the Brexit referendum, without indication that growth is slowing.
A number of leading economists and thinktanks had predicted that short-term growth could be between 1% and minus 6%, according to Westaway.
Westaway said that he expected a hard Brexit with subsequently the “most negative” economic impact.
“Such a departure from the EU could become messy, if the UK has to pay the €60bn compensation demanded by the EU ahead of an agreement about trade relations,” he said.
He added that, despite gloomy forecasts, Trump’s election had lead to equity markets improving almost 11%.
Vanguard’s chief economist also put the impact of a possible presidency of French Euro-sceptic Marine le Pen into perspective.
“Before she can translate her anti-European rhetoric into action, she will have to take on several hurdles, including gaining the support of the French parliament,” he contended.
Westaway also noted a “strong political determination among EU members to keep the union and the euro together”.
The economist also saw risks in the valuation of many asset classes which, in his opinion, were too high as a result of central banks’ accommodating monetary policy.
“There is much uncertainty about what will happen when the quantitative easing is to be reversed,” he explained.
Westaway said he had also observed market worries about the long-term impact on worldwide trade from both Donald Trump’s “America first” policy and the future trade relationship between the UK and the EU.
The investment strategist reiterated that low returns were to be the “new normal” and that increasing investment risk for better returns won’t be a “free lunch”. However, Westaway acknowledged that active asset managers could help “at the margin” in this environment, but maintained Vanguard’s corporate message that a low-cost approach was more important than ever.
Also during the conference, fixed income asset manager Pimco suggested that increasing interest rate hedging on liabilities in the wake of rising interest rates was not always the best way to reduce risk.
“Adjusting the hedge will incur costs,” argued Patrick Dunnewolt, Pimco’s head of the Benelux region. He underlined the importance of remaining flexible during times of “radical uncertainty”.
In his opinion, a pension fund’s risk budget could better be spent on an underweight duration than on a re-allocation to risk-bearing assets.
He also suggested investing outside Europe because of an increased likelihood of higher returns, switching to an active manager, or following an absolute return strategy.