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Focus Group: Risks get real

We asked a group of 30 pension funds with total assets of €293bn what risks the markets will face during 2018

focus group dec 2017 pt2

Just over a third of the investors polled for this month’s Focus Group identify geopolitical tensions as the biggest economic or political risk facing the global economy and financial markets in 2018. As a German fund puts it: “Unhedgeable events with unforeseeable damages are the biggest risks.”

A quarter say their biggest concern is the increased risk of a hard Brexit. A Dutch fund comments: “Brexit might be even trickier than we expect. The amount of money invested in London is huge. Also, the importance of London for the functioning of our money and real estate markets is underestimated.”

The influence of populism on global politics, global trade disputes and a hard landing in China were each identified as the biggest risks by 10% of respondents.

In relation to the biggest financial risks facing euro-zone-based investors, 38% of respondents identify stretched asset valuations, while 31% point to the tapering of quantitative easing by the European Central Bank (ECB). 

“The uneven growth and economic strength of member countries challenges
A German fund 

“Assets have been massively repriced through QE,” says one UK fund. “Unwinding is expected to be cautious and gradual, but is at risk of mismanagement from central bankers. Getting this wrong could lead to significant risk materialising.”

focus group dec 2017 pt1

Two-thirds of respondents expect monetary policy in Europe to remain broadly the same in 2018. A quarter expect it to become tighter, with a Dutch fund stating: “Economic conditions will improve further and, although inflation will remain low, this gives room for tightening.”

“Economies are still struggling to heal after the global financial crisis. Restrictions on trade and immigration championed by Trump would further hamper global growth. Furthermore, China is struggling to implement reforms and Europe is being rocked by political instability”
An Italian fund 

Some 45% of respondents expect their domestic policy rates by the end of 2018 to be the same as they are today, with the same proportion expecting them to be higher than they are today. “Some loosening seems inevitable in the UK, but it will be a slow journey,” says a UK fund.

Some 61% of those polled expect their domestic yield curves to have moved very little by the end of 2018. Another 21% say it will have remained steep or steepened further from its current position.

“Poor Brexit negotiations may lead to further falls in sterling; leading to more imported inflation and rate rises
A UK fund 

Just over half of respondents say current economic conditions make shorter-term, dynamic asset allocation more important. 

An Italian fund comments: “As negative real returns created by zero interest rates leads to a decline in the value of investments held in bonds, investors are increasingly forced to look at other, maybe riskier asset classes.”

Some 62% of respondents say correlations between asset classes are more likely to increase. “All assets are overpriced; a correction is likely to impact all assets,” says a UK fund.

Participants consider commodities the most fairly valued asset class, with US equities the most overvalued and emerging market equities the most undervalued.

For half of the funds, protecting the downside is an investment priority for 2018. For 28%, de-risking is a priority; for 21%, implementing more tactical or dynamic asset allocation; for 17%, taking advantage of the upside; and for 14%, coping with tighter monetary policy.

Dominic Gane

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