From Offshore Bankers

After a summer marked by swirling volatility that buffeted markets, investors may be left unsure of their next moves.

Presenting at a RBC Wealth Management media roundtable event in London this morning [Nov 5], Frédérique Carrier, Director, European Equities, and Guy Huntrods, Managing Director, Head of Investment Counsellors, outlined four main pressure points currently faced by high net worth investors and provided insight into RBC’s current portfolio positioning in light of these macroeconomic risks impacting the markets.

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.’

Global debt bomb

Ms. 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

Ms. Carrier continued: ‘QE is may not be the silver bullet the world had hoped, 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 Ms. 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 Ms. 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 said Mr. Huntrods.

‘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,’ continued Ms. Carrier.

‘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 Ms. 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 Mr. Huntrods.

For more on this story go to: http://www.offshore-bankers.net/article/22491/rbc-wealth-management-outlines-four-main-pressure-points-currently-faced-by-hnw-investors

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