Written by Cormac Nevin
Markets appeared relatively quiet last week, particularly from the vantage point of a GBP-based investor. The MSCI All Country World Index of global stocks rose +1.4% in local currency terms, but only +0.3% in Pound Sterling terms as GBP rose against other global currencies due to stronger than anticipated (but still weak) economic growth being reported. Bonds took a bit of a round trip last week, the US 10-Year bond yield jumped on Wednesday when the consumer price index measure of inflation came in a little hotter than expected. However, this jump was more than reversed on Thursday when the producer price index showed much better data. It appears the disinflation process remains on track in the US, and bond yields finished the week lower than where they started meaning the price of bonds increased.
What was perhaps more eventful last week was the geopolitical spectacle emanating from the Munich Security Conference. JD Vance, the new US Vice President, delivered a speech which provoked an indignant response from many European politicians. He made it clear that the new US administration has far less patience for guaranteeing the security of Europe than in past decades and even went so far as to criticise forces which he viewed as the “enemy within” many European nation-states. It appears the world is moving toward a dynamic whereby countries pursue their own self-interest more rapaciously. As the relatively wealthier, more innovative and militarily powerful member of the Western Alliance, the US seems to want to flex these muscles.
Politics aside, something that jumps out from a long-term study of markets and asset classes over the past 150 years is the degree to which sufficient geographic and style diversification provides the best probability of navigating a changing geopolitical landscape. The best way to achieve consistent returns to build & preserve wealth is to build portfolios which are resilient to a range of outcomes and with exposure to opportunities that are not concentrated in one geography. A globally diversified portfolio would have offered a great deal of aid to investors in managing through events as different as the Russian Revolution, the two World Wars, the 1970s inflation shock or the 2000s tech blow-up*. Perhaps this is particularly pertinent at this point in time, when many portfolios are heavily concentrated in rather expensive US assets.
*Source: Saphier, M., Karniol-Tambour, K. & Margolis, P, (February 2019) – Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated. [Report]
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