The aptly named Trumpeter Swan – indigenous to North America, notably also the heaviest living bird in the USA. You wait for a black swan and two come along within six months. (Ok, those ornithologists amongst you have already spotted that the Trumpeter Swan isn’t a black swan, just relax and go with my poor metaphor.) As regular readers of our weekly newsletter will know, we did not try to call the Brexit vote and neither did we take a bet on the US election. Making big bets on binary outcomes is not conducive to steady long-term capital preservation and growth in any macroeconomic environment. Our long-held approach of ensuring portfolios are diversified and when needed defensively positioned has served our clients and us well through a turbulent 2016.
However, when you get two such dramatically mind-boggling results an existential re-evaluation of our view of the world is a valuable and important process to undertake. Indeed, during an investment committee meeting on the eve of the US elections, we discussed a process that we utilise to evaluate our view of markets and asset classes in three months’ time, whereby we generate a collective view ranging from bearish (-2) to bullish (+2). This article will explore a few future events that have the potential to deliver further ‘surprises’.
Are there other black swan events on the horizon? Is France next in line as the paradigm shift in the geopolitical landscape continues? Having been invited to attend a recent STEP event in Geneva at which Nigel Farage MEP was the guest speaker, there were more than a few disconcerting themes emerging. (A) Protest votes; the anti-establishment movement has now gained significant momentum. (B) The protagonists; Farage, Trump, Le Pen, et al. are exposing and exploiting this disquiet among the disenfranchised. (C) While they may sound plausible (and conciliatory in acceptance speeches), there is a thin veil and echoes from our recent past become louder by the day. The rhetoric used, particularly regarding putting up borders and regaining sovereignty is sending the global political process hurtling back toward early 20th century views – Brits with a long memory may recall Oswald Mosley and his blackshirts.
So what else is on the horizon? One cyclical landmark that hasn’t hit the mainstream press as yet is the US debt ceiling renegotiations in March 2017. Once the Donald takes office in January, this will be one of the first major domestic events on his agenda. While the Republicans secured a majority in Congress and the Senate, will the derision and disharmony within the party twinned with a conceivably democratic protest vote generate a further surprising black swan event? Given that his intentions are to spend big on infrastructure at home (and given his self-proclaimed mantle as the ‘king of debt’), there is considerably more uncertainty than on previous occasions.
The consensus view is that the can will be kicked down the road again, however, given the contrarian outcomes of 2016 the outcome might not be as straight-forward this time around.
To quote the future president “The US will never default because you print the money”.
While the spectacle of watching the clock tick toward midnight is a political dramatist fantasy, the reality could soon become a government bond debt nightmare for investors. It may transpire that common sense finally prevails. However, one or two swing dissenters could quite literally bust the biggest bubble of them all – QE-fuelled US debt. A second scenario and perhaps a more logical one would be a further last-minute deal to defer actually making decisions and tackling the debt mountain, this could trigger a potentially unheralded downgrade of US debt by the rating agencies.
Not wishing to be a harbinger of doom there are some positives to draw upon from a portfolio management perspective. Trump is pro-business and will be investing heavily in the US; this bodes well for long-term US equities. For several years now, the long bull run in bond markets has been expected by most managers to finally end, and we are positioned accordingly. Our volatility management and alternative strategies will continue to generate returns if bear markets prevail.
Maxims about predicting the outcome of political events are in many ways similar to every investment professionals caveat emptor – past performance is not an indicator of future returns.
Change does bring opportunity; we might not like it, but the world has never stood still, as active investors, our role is to identify ways to generate alpha in changing environments. However, our approach to managing client portfolios will remain constant as we focus on minimising risk and preserving capital.
We would encourage our investment and fiduciary partners to consider reviewing their client portfolios in light of changing circumstances, to gauge whether historical asset allocations and portfolio management approaches remain suitable for their clients (particularly within the fixed income space). Should you wish to engage us to conduct investment reviews, we would be pleased to assist you in assessing and re-aligning client portfolios to suit the world we all find ourselves living in.
2016 has certainly been a year that will live long in collective memories, let’s see what 2017 has to bring, not too many more species of black swan one hopes!
For more information on our portfolio management views or if you have any questions, please get in touch with our teams in Guernsey, South Africa, Isle of Man, Singapore and the UK.
(Avid ornithologists are welcome to learn more via the Trumpeter Swan Society website: http://www.trumpeterswansociety.org/swan-identification.html)The ‘Trumpeter Swan’ has landed