Navigating the Markets in a Year of Transition


Navigating the Markets in a Year of Transition
The CFA Institute Annual Conference is an unrivaled opportunity to access high-quality, unbiased educational content that equips investment professionals with the latest thinking on critical industry issues. The 71st CFA Institute Annual Conference will be held in Hong Kong on 13–16 May 2018.

Elizabeth Corley writes crime novels in her spare time, so it was fitting that there were some suspenseful moments when the Allianz Global Investors vice chair addressed delegates at the 70th CFA Institute Annual Conference.

Corley described 2017 as a year of transition as she shared her outlook on the economy, geopolitics, fiscal and monetary policy, and their implications for global investors. And while she characterized the environment as challenging and struck a cautious tone, she also offered hope and some words of advice for beleaguered active managers.

Corley sees generally “improving cyclical forces amidst a backdrop of structural challenges.” While labor markets are mixed worldwide, employment in the United States has been notably strong. There’s also evidence of reflation in the manufacturing and service sectors, driven by rising commodity prices.

And notwithstanding the US Federal Reserve’s intention to return to a more normal monetary policy, central banks around the world remain accommodative. But Corley’s narrative took a dark turn as she gave a sober assessment of some of the uncertainties and potential obstacles investors face.

Stock market volatility, best measured by the CBOE Volatility Index, remains at historically low levels, which may suggest an unhealthy level of complacency. The geopolitical climate is similarly concerning. Global conflicts, the ongoing threat of terrorism, the refugee crisis in Europe, and surging populist movements all represent significant headwinds for investors. So too does the overhang of sovereign debt and aging populations and declining productivity in the developed world.

Of course, uncertainty is nothing new for investors. And despite the rising popularity of passive investing, Corley sees opportunity in the current environment for active managers. In fact, she considers the trend toward passive investing a force for good in the financial industry, putting downward pressure on fees, which have been a persistent target of criticism for the industry. A 2016 study by Allianz found that three out of five institutional investors surveyed think active management offered superior net performance and better downside protection.

While recent results suggest otherwise, Corley does think active managers can add value when it comes to uncorrelated markets and responsible or environmental, social, and governance (ESG) investing, niches that are rapidly gaining greater market share. However, she warned that this surge may not be entirely genuine and that as many as four in ten ESG funds in the United Kingdom are socially responsible in name only.

What are investment managers to do in a world of geopolitical turmoil, economic uncertainty, and low returns? According to Corley, they should pay close attention to macro developments, include active investing as a key component of their strategy, and feature alternative assets and dividend-paying stocks in their portfolios.

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And above all else, they should focus on understanding their clients’ needs and take measured risks to reach their objectives.

Mystery solved. Oftentimes the right answer is the most obvious one.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo courtesy of W. Scott Mitchell

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