One cold, winter evening in February, three Dutch investment strategists gathered to discuss macroeconomic headwinds.
Much as the rest of Europe, those participating in the 2019 Asset Allocation Awards and Debate were bamboozled by Brexit. Apparently even George Osbourne, former Chancellor of the Exchequer, can only manage to stay one step ahead of Brexit. Lukas Daalder who now works with Mr. Osbourne at BlackRock has witnessed that “he does manage to stay one step ahead, but he can’t see much beyond that.” Considering its calamitous potential, the markets have reacted rather mildly to Brexit. In the years following the great financial crisis, investors have treated geopolitical uncertainty with little regard, from “what is going well to completely disastrous – the markets just waltz onwards,” exclaimed Daalder, Chief Investment Strategist of the Netherlands.
The fact remains that geopolitical events do impact investments, which is why BlackRock developed the Geopolitical Risk Indicator. Although the Indicator works with four macro data drivers, Daalder remains steadfast in his belief that market expectations are the most important element to consider. “What is the market climate when the news hits? What has already been priced in?” He is confident that weaker fundamentals cause markets to be more sensitive to potential problems.
Olaf van den Heuvel, Chief Investment Officer at Aegon Asset Management, views demographics as the most influential geopolitical factor for investors. Advantageously, it is also a quantifiable variable. The more difficult story to paint is Trump, the ECB, the labor market and populism – “none of which are positive,” admitted Van den Heuvel. Aegon AM has already priced central banks in. “No one expects the interest rates to decrease in the US and Draghi is leaving, which means that Klaas Knot will need to come with a bazooka.” Admittedly a thoroughly enjoyable image. Currently Van den Heuvel is opting to allocate towards illiquid investments (ABS, mortgage backed securities) and specialized income (Multi Asset).
Willem Barentsen, Chief Strategist of Achmea Investment Management, sees a ‘trilemma’ facing the world economy. “We will have to prioritize two of three possibilities: economic integration, democracy, or national sovereignty,” said Barentsen. The notion of the Political Trilemma was proposed by Dani Rodrik more than a decade ago, and was contextualized neatly by Dr. Angus Armstrong: “One way to understand [it] is to see that something valuable must be given-up. The origin of these models is Keynes’s uncovered interest parity theorem, but these days they are applied in many different contexts.” Barentsen stops short of telling us which two possibilities will prevail. Perhaps it wasn’t necessary to do so.
As Harold James puts it, “there is never pure capital mobility, or pure monetary policy autonomy. Some restrictions on capital mobility – even the home preference of investors, or increased macroprudential controls on banking – gives room for policy maneuver.” Ultimately, these three strategists all just need a little room for maneuvering. (Klaas Knot with a bazooka may not be a bad idea either.)