Investment 202

Navigating the Economic Landscape of 2018

Black Swans

If there was a prevailing theme for 2017, it could be the series of recent Black swans –statistically unlikely events that have now become our base reality. One such significant event was the U.S. presidential election result of 2016. Days before, theidea of Trump as President was what many have now come to accept as an “alternative fact”. Armed with the nuclear launch codes in one hand and a renamed twitter account on the other, it is Russian roulette in its most theatrical form. Much mayhem
can be unleashed at 3am from the seat of power, be it the throne in the oval or elsewhere between the East and West wing. Regardless of location, the person in the seat of power has become our new normal.

Political Overhang

Never before has global economics been so beholden to politics. For example, the constantly evolving Middle Eastern situation between Saudi Arabia and Iran is one to watch closely. There are many red flags in the regional economy that could forebear higher oil prices and their direct impact on global growth in addition to this. The tension with North Korea, while they may not result in a “first strike” by either party (twitter account notwithstanding), is vulnerable to political miscalculations which can have drastic and undesirable ramifications on global risky assets in the short term.

Easy Cheap money

Equity markets are especially buoyant with the “Trump effect” now in full swing. Several rounds of historical quantitative easing succeed the backdrop of sustained, low interest rates to create a “goldilocks era” for equities. This is further compounded by the pricing-in of Trump’s infrastructure blitzkrieg followed closely with a tax reform agenda which are ostensibly riddled with the bullet holes of self-interest. The good news is that jobs data is promising with global unemployment being a structural bull market with historical low volatility and consistentdemand. Trackers are wonderful if they are linear, but if everyone is heading for the Exit door, when sellers exceed the number of buyers, there emerges a significant disparity and divergence between the net asset value and the market price of the underlying. While liquidity is the cure-all for market mispricing, the absence thereof can be devastating.
Given the pitfalls that surround the private investor in 2018, clients need to engage a nimble and active manager to preserve wealth and deliver returns. Opportunities abound if one has the correct timely advice and guidance. Ideas delivering alpha in 2018 are big data, automation and robotics, and the use of artificial intelligence across various industries. But there are challenges that need to be circumvented in the coming year. The disruption of the economic and political landscape where established agreements and treaties such as NAFTA and NATO are put to the test, impacting assumptions and challenging historic partnerships and bilateral agreements in the way a black swan does. However, in the midst of chaos and volatility exist opportunities to profit.
There are always two sides to a trade. At times of such macroeconomic challenges, a responsible wealth manager could change the game for the investors. Patronus Wealth was created to cater to high net worth individuals who feel disenfranchised with institutions who treat at historically low levels especially in the USA, UK and Asia. While Europe still suffers with some slack more concentrated in the South, that too is improving at a decent pace. The threat is that risk premia on financial assets have declined to the point that returns are no longer commensurate with the actual risk. The upside on equities may not be that of 2017 but still looks selectively positive for 2018 with global growth intact.

The Fed’s gears up

The market currently prices in three rate rises of 25bp each over the course of 2018. However, the impact of the tax cuts alone has resulted 10-year treasury yield spiking to above 2.5%, indicating that if inflation were to increase above the expected trend, the Fed may have to act more aggressively which will have an impact on the high yield space, especially on emerging market high yield. Never since the time of Bretton woods has the world been so dollarized as it is today. The Bank for International Settlements (BIS) claims that emerging markets (EM) have issued more than $10 trillion of credit since the early 2000s. In their search for yield, investors who settled for low credit quality and long duration in this space would be wise to protect themselves. The funding cost of EM dollar denominated bonds shadows the fed’s movement. The likelihood of default increases exponentially because the potential impact of emerging market currency depreciation and volatility can be sudden, violent and nauseating. Switch to Active Over the recent past, the returns of actively managed funds have been disappointing compared to their benchmarks and have resulted in investors questioning the fees they were paying for lacklustre performance as a result, switching to passive strategies in index funds and ETF’s with more than $4 trillion now invested in global ETFs. This strategy works well in them as a pure statistic vis-à-vis the sales pitch they received when they opened their private banking account. Clients find themselves beleaguered by compliance related questions without the opportunity to discuss the performance of their portfolio. Calls and emails to relationship managers (if they even know who the current person is) go unreturned for days and when finally attended to, the idea is no longer financially relevant. What clients need is a relevant and efficient private wealth management service. Patronus Wealth aims to provide clients with a personalized human touch with a Swiss trained team that is always accessible and responds to client needs in a precise and timely manner. The firm provides clients with discretionary, advisory and execution-only services with online portfolio access and reporting. Clients can open an account in two booking platforms where assets are custodized in Switzerland and sensitive client information is securely retained, off-line in the Dubai International Financial Center (DIFC). Patronus Wealth Privé (DIFC) Limited is regulated by the DFSA. Patronus was set up by Romesh Atapattu and his partner Nikhilesh Pawar, who count 35 years of combined Swiss Private Banking experience and a 14-year partnership. The firm was created in response to their customers’ requests for a personalized client-centric wealth management experience. Patronus wealth can be contacted through www.patronuswealth.com