1. Newsroom
  2. The return of politics
Menu
UBP in the press 06.12.2016

The return of politics

The return of politics

Le Temps - 2016 has brought us a whole series of unpredictable political events, or at least events that were not anticipated by most experts and pollsters.


As well as the main referendum (Brexit) and the main election (Trump) in the last six months, there have been partial elections and primaries in several European countries. The overall trend shows a desire for countries to turn in on themselves and for economic stimulus, provided that such programmes deliver practical benefits to the countries concerned and not emerging markets as has been the case in the past. Economists now expect austerity plans to be challenged, including in the most orthodox countries, and we are seeing certain countries adopt new infrastructure development and rearmament plans. That shift could achieve what central banks have been trying in vain to deliver, i.e. a long-awaited return of controlled inflation. However, these policies, with their more protectionist and populist slant, could also cause collateral damage by unleashing inflationary pressures that are harder to manage.

The markets have reacted immediately and sharply, although the reactions have not been what the experts expected. Contrary to expectations, the markets did not fall after Donald Trump's election victory, any more than they did after the Brexit vote. They have welcomed the stimulus policies and tax cuts announced in both the UK and USA. They have responded positively to the shift towards more unapologetically proactive fiscal policies, taking over from sterile monetary policies. In the USA, bond yields have risen sharply all along the curve. Share prices have hit new records and the dollar has started rising again. Safe havens like gold have even suffered a correction, contrary to the expectations of all strategists. There is now the widespread expectation that official interest rates will rise.

Bond yields have increased significantly, producing short-term opportunities on certain dollar-denominated fixed-income securities. However, the result has been a sharp drop in the prices of bonds with long durations, along with wider spreads on lower-quality bonds. We are therefore seeing a resurgence of risk, and this has badly affected portfolios put together in the last few years that contain bonds of dubious quality in some cases. Several recent articles have discussed the shift and how it affects bonds held in investment portfolios (see article in Le Temps on 28/11/2016); they have emphasised the need to rebalance portfolios by investing in equities, in order to avoid even greater corrections in the event of a sharp upturn in inflation expectations.
 

This turn in the trend and the totally new global political landscape will make it more important to take a more dynamic approach to bond investing and asset allocation, far from the entirely passive, algorithm-driven investing approach recommended by some. Investors with static portfolios are about to rediscover risk, and will have to adopt more active, dynamic and innovative ways of managing their bond investments. It has been a long time since we had to deal with a genuine upturn in bond yields, and it is not something that private and institutional investors expect any more. It will be interesting to see how the return of significant risk levels will affect savings flows given that higher interest rates cause bond prices to fall sharply, which traditionally has a chilling effect on activity in private portfolios.

The first step required in a situation like this is to reallocate portfolios and shift into more defensive bonds, which have been out of favour for many years, particularly TIPS (inflation-linked Treasuries) and floating-rate notes. These types of bonds will give investors a more comfortable ride as the bond market returns to normal, with higher yields across all maturities and a steeper yield curve. Adjusting bond portfolios in this way is clearly a major priority after recent political events.

The promises made by Donald Trump convinced millions of Americans, and the British people voted to leave the EU. The political decisions that flow from those two votes will force all nations and economic zones to look to the future, to show their electorates that they are addressing issues like employment and national sovereignty. These trends represent a challenge to an established order in which austerity policies are the norm and policy is set by central banks. The return of politics will have major consequences, such as economic growth moving out of sync globally and inflation rising sharply. We are seeing a real change in the political paradigm, which may have a larger-than-expected impact on market volatility and portfolio risk. Careful risk management and the reallocation of assets into highly predictable securities, particularly high-quality equities, will therefore be crucial in 2017.
 

Read the original article in French


MichelLonghini.jpg

Michel Longhini
CEO Private Banking

Insight

Navigating wealth succession in Asian families

Wealth succession is complex, emotional and can be costly if not managed properly

Read more

Le news più lette

UBP in the press 02.04.2019

Zurich: a nerve centre for UBP

Le Temps (29.03.2019) - UBP, which acquired Coutts exactly four years ago, has doubled the amount of assets it manages in Zurich to CHF 25 billion in five years. We spoke to Adrian Künzi, who has headed UBP’s local branch for the last year.

UBP in the press 26.03.2019

UBP is ready for all Brexit eventualities

AWP (25.03.2019) - Union Bancaire Privée (UBP) anticipated the uncertainties surrounding future relations between the United Kingdom and the European Union. By expanding in London with the acquisition of ACPI and maintaining a strong presence in Luxembourg, the Geneva bank is prepared for any outcome, as its CEO Guy de Picciotto explained to AWP.

UBP in the press 03.04.2019

Taking on more credit risk

Option Finance (21.03.2019) - With economic growth returning to normal, the end of central-bank monetary tightening and an upturn in volatility, bond management could benefit from three main approaches: gradually taking on more credit risk, increasing duration, and seeking liquidity.

Altro da leggere

UBP in the press 19.09.2019

“Extremely low interest rates set to persist”

Frankfurter Allgemeine Zeitung (13.09.2019) - Swiss asset manager Nicolas Faller expects high stock market volatility

UBP in the press 18.09.2019

Challenges & Opportunities in Impact Investing

Financial Times (12.09.2019) - It is difficult to regard the 2008 financial crisis in anything other than a negative light. However, for one area of investment, it marked a significant acceleration in prospects.

UBP in the press 13.09.2019

Asset TV Masterclass : Fixed Income

With interest rates at rock bottom, bond markets have become very expensive. So why would anybody want to invest in fixed income? Where does the balance between risk and reward lie in these markets and how are central banks responding to slower growth?