This article was written by Julien Serbit (pictured), portfolio manager at Geneva-based wealth management firm Prime Partners.
One of the most common and wise ways to predict developments in markets is to look for similarities to what has happened in the past. However, every individual situation takes place at a precise point of time and under unique conditions.
The finance industry is no exception to this rule, and working in the interests of our clients means that we have to know the medium-term economic scenario we are working on. Fortunately, this is just one part of what our decisions are based on. It is essential when making investment decisions that we adjust according to daily economic changes. For this, common sense is very important.
Let’s have a quick overview of the present economic and financial environment: trade war, negative interest rates, populism, Brexit, the dichotomy between the manufacturing and the service segments of the economy on the one hand, innovation, digitalisation, strong consumption and even growth on the other.
Economically, is this combination of factors sufficiently positive to justify some equity markets or segments being at historically high levels, mainly in the US or in the growth sectors?
In the television show ‘Who Wants to Be a Millionaire?’, it is possible to phone a friend for common sense advice. In this case, my sensible friend’s clear answer is no.
I am not alarmist, or trying to forewarn of the next major economic crisis. However, I think it is common sense to say that the current economic and financial conditions are not as good as the equity markets levels suggest. The negative interest rates strike me as strange, and I believe that unilateralism and insularity are intrinsically negative for the general interest. I also think that excessive debt accumulation is dangerous.
We are, however, seeing a fantastic period of progress across information technology and its wide variety of practical applications.
Many emerging economies are moving closer to the developed ones and consumption and growth won’t collapse tomorrow.
Last but not least, the financial environment is evolving in a delicate balance.
The actual valuation of equity markets seems to be disregarding many factors within the current economic climate, and I don’t pretend to know whether risky assets will adjust to other economic data or vice versa.
That being said, risk management is key for the portfolios we are supervising for our clients and therefore tactical asset allocation should do well in the coming months, barring any unexpected events.
Rely on your common sense! That is our motto.