Wealth management: weather the new norm

Stormy weather london
By Ian Harper, The CA magazine

9 February 2018

Riding out an age of change and disruption will be the challenge for wealth managers in 2018 reports Ian Harper.

For wealth managers and asset allocation, 2018 marks a new epoch. Change and disruption – political, economic, social, technological and environmental – are the new normal. Investors face a period of big risks and huge opportunities.

According to Jonathan Tweedie, Brewin Dolphin’s Head of Office, Edinburgh: “The drivers and pace of change today are at unprecedented levels. To create the very best client outcomes, it is essential to understand the reasons for change, analyse the impact and anticipate the opportunity.”

He listed three key issues to watch:

  1. The impact of disruptors such as Amazon and Tesla in the global marketplace.
  2. The wealth gap: it is arguable that in the history of mankind the wealth gap has never been greater, and this is likely to lead to further political and civil instability.
  3. Global fiscal policy: will quantitative easing (QE) be unwound or did central bankers learn a dangerous new trick? And what do we do about rising inflationary pressure?

At Investec, while Senior Investment Director Gordon McAndrew expects markets to continue to “grind higher”, he has no doubt that returns will be harder to achieve, while market volatility will increase.

Will Hobbs, Head of Investment Strategy at Barclays Wealth & Investments, pointed to changes in global demand and mainland Europe: “Investment is picking up, suggesting that global demand has become less reliant on the broad shoulders of the developed world consumer.

"Meanwhile, the emergence of a plausible upside scenario in Europe, distinguished by a more collegiate political backdrop, a healthier banking sector, and even meaningful steps forward in the construction of a credible fiscal and political architecture for the euro, should help to drag the distribution of outcomes for European risk assets higher.”

The only way is up?

Intimately related to QE are interest rates. Have we now reached the point where the only way for them is up?

While 30 years of a bond bull market, with falling yields and interest rates, may have bottomed out, Chief Investments Officer at Thorntons, Matthew Strachan, believes the capacity to raise rates is limited.

He said: “Debt has soared over the last 10 years, making economies much more sensitive to rising rates. The recovery in global growth could be rapidly curtailed. For similar reasons, it is likely that inflation may be capped at lower levels than in the past. Limited increases in interest rates and inflation should, therefore, have limited impacts on valuations and asset allocation; they also mean lower investment returns than we have been used to.”

Whilst the ongoing uncertainty will likely lead to some degree of market volatility, it is likely to be most keenly felt within currency markets.

Jonathan also doubts there will be significant rises for either interest rates or inflation: “Consequently, we remain comfortable with our overweight position in global equity.”

However, Will feared central bankers may be reluctant to act quickly enough to deal with an overheating economy.

For clients facing retirement, Peter McGowan, a chartered financial planner at French Duncan, added: “Annuity rates starting to rise from historic lows is a positive sign for clients looking to secure a guaranteed income, while a likely drop in the value of any transfers out of defined benefit pension schemes due to rising gilt yields is a potential downside.”

The UK, Brexit and Corbyn

For investors worried about Brexit, Alan Steel, MD of Alan Steel Asset Management, has simple advice: “Invest in overseas markets. I personally think overdone Brexit fears have created value in UK small/mid caps, while well-positioned large-cap funds will benefit anyway, thanks to their global reach.”

At Brewin Dolphin, currency is influencing asset allocation. “The consequences of Brexit … have very much been felt in the currency market, with a devaluation of sterling. Our asset allocation remains focused on overseas earning and non-sterling denominated businesses,” said Jonathan.

It’s currency, too, for Gordon: “Whilst the ongoing uncertainty will likely lead to some degree of market volatility, it is likely to be most keenly felt within currency markets.”

For Morag Watson, a private client partner at Scott-Moncrieff, the key Brexit issue is the sense that it is likely to mean tax increases. She warned: “The tax planning environment is now coming under much greater scrutiny, meaning clients need to be very careful about any measures they put in place.”

The rise of Jezza

A Corbyn government is a serious prospect. So what would that mean for the wealth managers and asset allocation? All but two of our experts declined to comment and neither of those was enthusiastic.

Gordon said: “Jeremy Corbyn and Shadow Chancellor John McDonnell are recognised as the most left-leaning party leadership in living memory… there is the threat of a classic ‘soak the rich’ tax regime with a view to redistributing wealth. It is highly probable that unearned income and capital gains would be prime targets. In the event that Labour was to come to power, these threats would perhaps take some time to be reflected in real economic data, but our fear is that currency traders would recognise the risk much more quickly.”

Alan believes a Corbyn government would be likely to face an immediate run on sterling: “Serious money would get out the UK before they brought in capital controls. Asset allocation would swing heavily to overseas funds.”

The really big deal

For 2018 and beyond, two other factors will influence asset allocation enormously – climate change and AI.

Exxon Mobil faces numerous actions into whether it lied to investors and committed fraud by covering up for decades the impact of its business on climate change. If Exxon Mobil loses, the whole fossil fuel industry becomes a valueless “stranded asset”. Institutional investors and major fund managers (e.g. BlackRock) are already reducing exposure to potentially impacted holdings, and climate change could also affect migration and political stability.

Of AI, Jonathan said: “The carbon age may be coming to an end, while the ‘Fourth Industrial Revolution’, artificial intelligence, has the ability to change Earth’s long-held human-centric status quo. The future is here today and failure to recognise this will impact clients’ wealth. Just think about what railways did to canals and multiply that by the biggest number you can imagine.”


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