8 Takeaways from Our New York Investment Forum

2017/09/20
Neil Dwane speaks at the Investment Forum in New York

Summary

In early September, our strategists, economists and portfolio managers from around the globe convened in New York for our semi-annual Investment Forum. Their goal? To explore the way forward for our clients in a world where taking risk is necessary to earn a return, but where opportunities are getting harder to find.

Key highlights

  • The global economy has moved away from a synchronized upturn
  • We are at peak liquidity ahead of the “great unwinding” as central banks contemplate quantitative tightening
  • Risk management must become more tailored and sophisticated
  • Active management remains key to finding return potential against this uncertain backdrop

Investors still must take some risk for the potential to earn some return

For some time, we have been advising our clients to take measured risk in their portfolios – and that advice has not changed. With interest rates set to remain lower for longer, investors simply have no choice – even with the markets near record highs. Yet investors certainly have risk on their minds. Our new RiskMonitor 2017 survey shows that geopolitics are the top concern for institutional investors, and two-thirds say active management is essential in this market environment.

Philanthropic giving could be the next ESG frontier

ESG (environmental, social and governance) investing is now mainstream and takes many forms – from screening to advocacy to impact investing. The majority of investors use ESG for return potential, and leading pension funds choose companies that exhibit good governance. But new ESG areas are emerging – such as philanthropic giving – that put more emphasis on societal impact. The days of seeing philanthropy and investing as separate things may be over.

Look for value in the US market

Long-term US fundamentals look troubling: Productivity growth is down and the labour force is declining, indicating softer growth ahead. So why are stock valuations so stretched? Because equities are the best option for many investors, and because companies are using low-interest loans to buy back shares. As the US Federal Reserve raises rates, stocks may pull back. But if reflationary policies work, value stocks – particularly energy and banking names – may begin to outperform.

US energy independence is getting closer

The US shale gas industry has changed the world order for oil: Post-shale, oil prices halved, US consumer energy spending hit multi-decade lows and OPEC lost much of its power. The US is marching toward energy independence, but is the market under the false assumption that shale will grow forever? Traditional energy stocks have come under intense pressure despite strong fundamentals, which may be a good contrarian buying opportunity.

No easy fix for the productivity challenge

Productivity is arguably the most significant driver of economic growth, but productivity growth is slowing and shows no sign of turning around. One reason is the demographic “time bomb” of our aging society. To be sure, some new technologies could help, but they have yet to deliver their full transformational value. The key to tackling the productivity challenge is corporate and government leadership that emphasizes innovation, research and development, and long-term thinking.

Expect a slow slog for President Trump

Although Mr Trump’s presidency so far has been a rocky one, his administration still has goals to meet – tax reform, in particular. Yet changing the tax code may be a slow process, given the many vested interests at work. As a result, some kind of “tax reform-light” may materialize before 2018’s mid-term elections – which will be a critical moment for the president’s party and a litmus test on his own popularity.

US health care needs a cure

Health-care costs represent 16 per cent of US GDP versus around 6 per cent for most other developed countries, and the US is on track to spend 27 per cent by 2028. The quality of care is high for those who can afford it, but costs are rising unsustainably – and the added spend doesn’t always equal improved outcomes. Addressing pharmaceutical spending is one possible solution. Investors in pharma stocks should avoid firms with overlapping products and look for innovative products with proven outcomes.

We might be mis-measuring inflation

The Phillips curve – the model that central banks use to measure how increased levels of employment result in higher inflation – may no longer be valid, but the bigger question may be whether inflation is being mis-measured. Do standard measures of consumer price inflation match everyday perceptions of how prices are rising? Are increased rental and commuting costs accurately reflected? Do lower tech prices offset escalating costs elsewhere? Policymakers should be aware of the real-world impacts of inflation amid increasing social divisions and the rise of populism. And investors must remain vigilant about protecting the real purchasing power of their savings from all and any threats of inflation.

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The Cure for Low Oil Prices Is Low Oil Prices

2017/10/27
The Cure for Low Oil Prices Is Low Oil Prices

Summary

An abundance of oil, thanks largely to US shale, has pushed down oil prices and sector sentiment. But since that means less investment in new production sources, the bearish market may soon rebalance from fears of oversupply to concerns over shortages – which would push prices higher.

Key takeaways

  • With few exceptions, oil remains undervalued by the markets and underrepresented in portfolios
  • US shale is still the star growth area of the oil industry, but it is cash-strapped and production estimates are too optimistic
  • Oil’s risk premium is still too low; geopolitical risks are rising in petro-states from Venezuela to Nigeria to the Middle East
  • The US natural-gas market, driven by US shale gas, is prolific and sustainable at low gas prices; the same can’t be said of US shale oil