Following the summer’s market volatility, RBC Wealth Management addressed some of high net worth investors’ macroeconomic concerns and provided insight into RBC’s current portfolio positioning, amidst a challenging market.
Frédérique Carrier, director, european equities, and Guy Huntrods, managing director, head of investment counsellors, outlined four main pressure points:
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Contagion effect
Frédérique Carrier commented: ‘Contagion from emerging markets leading to a possible recession is the greatest risk we see in the global markets. After the contractions in Russia and Brazil in 2014, attention is now firmly on China’s economy and corporate earnings. We believe that if China’s economy doesn’t stabilise, the risk of recession across developed markets would spike and that risk assets would fall in response. However, while the probability of an emerging markets-induced slowdown has increased throughout 2015, in our view it still remains low.’
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By GlobalDataGlobal debt bomb
Carrier continued: ‘There is a large global debt overhang in the world. This means any increase in interest rates, no matter how low, could have a disproportionate effect on economic growth.
‘While there are many debt hot spots, such as Chinese debt and housing bubbles, we believe they are unlikely to flare up at the same time. However, a rise in interest rates would likely ignite a debt brushfire, which could prove difficult to extinguish and perhaps jeopardise the recovery.’
Monetary policy inefficiency
Carrier continued: ‘QE may not be the silver bullet the world had hoped for, as global growth is disappointing and inflation expectations are being scaled back. If monetary policy is indeed ineffective, how will this impact the US, UK, Europe and Japan, who are all using the same approach? We expect that for now, the policy response will be more of the same.’
‘The Fed is also confusing financial markets by moving the goal posts after certain economic benchmarks have been reached. This inconsistent approach, is making monetary policy difficult to interpret, and undermines the Fed’s credibility,’ said Carrier.
Geopolitical risks
‘It’s rare that geopolitical risks have a long lasting impact on financial markets.
Nevertheless, the ongoing refugee crisis in Europe highlights a broader issue at play
in the EU, namely the difficulties that European governments have in reaching
consensus, which is ominous for a system based on cooperation.
‘This lack of cooperation could also arguably increase the risk of a Brexit as it may
undermine the UK’s negotiations with the Eurozone, or potentially erode public
support for staying in the EU, or perhaps both,’ said Carrier.
Portfolio positioning
Commenting on how investors can position their portfolios in light of these risks, Guy
Huntrods said:
‘Undoubtedly, investors have had a turbulent ride recently. However, we believe that
recent market angst doesn’t warrant too cautious an approach, and in fact may bring
some opportunities.’
‘In the fixed income universe, our mantra is "lower for longer". As a result of the
recent spread widening, we believe there are selective opportunities in fixed income
with a bias towards investment grade corporate bonds, Huntrods said.
‘With regards to equities, market volatility is providing opportunities. Specifically with
regards to high quality companies, we are seeking those that have a tailwind to
structural growth,’ Carrier continued
‘We are looking for companies that appeal to millennials, a growing segment with
unique spending patterns compared to previous generations. Companies in the
areas of tech, media, retail and telecom will likely benefit from the increasing
purchasing power of this segment,’ said Carrier.
Are alarm bells warranted?
‘While we continue to monitor macroeconomic risks, our investment view and advice
still stands. Although a concern, investors should accept volatility as the new norm
and look for opportunities for those businesses where fundamentals remain strong,’
concluded Huntrods.
