The latest chain of surprising US military actions in Syria, Afghanistan, and North Korea revived concerns among political risk analysts, while the French presidential election’s first round now looks like an open, four-way race, adding to the uncertainty. Nevertheless, the muted market responses, and the underlying macro trends continue to speak for a constructive investment outlook.
On April 6th, after a relatively long phase of general tranquility, global stock market volatility jumped again somewhat. The trigger was provided by US President Donald Trump’s surprising decision to order a cruise missile attack on a Syrian military airport. The decision came immediately after the first meeting with China's President Xi Jinping, and was quickly followed up by the diversion of a US carrier strike group to Korea, and the use of a new, huge bomb by US forces in Afghanistan. Meanwhile, a number of reports suggest that the first round of the French presidential election might still be completely open, while the British government yesterday unexpectedly announced a snap parliamentary election in June, potentially adding to the sense of political uncertainty. Since April 6th, the typical safe havens, i.e. Japanese yen (JPY), gold, and government bonds of leading industrialized countries - in that order - booked the strongest gains (see charts, page 2). Is the so-called Trump rally now finally over?
We must leave detailed geopolitical analyses to other publications, of course. Within our field of competence, however, we can at this point only reiterate our market assessment and positioning. Market-external events can trigger volatility - but these episodes usually don’t last long, while it is ultimately impossible to systematically predict such developments. Instead, we primarily base our tactical asset allocation (TAA) on structured assessments of the robustness of the fundamental and technical macro trends - and these have not changed thus far. We therefore reaffirm our constructive market outlook for the next three to six months.
It is probably useful to recall that, for months now, many strategists have been warning of an imminent correction of the Trump rally, which from a bearish viewpoint looks as if it is primarily based on false or exaggerated hopes. Of course, there is nothing wrong with correction warnings, and every bull market has and needs its bears. Since last year’s Brexit vote, however, too many market participants seem to be susceptible to political noise and hasty conclusions. As a result, a meaningful correction has continued to elude us. Even the current volatility outburst - the one that began with the US missile strike on Syria - is actually very muted when viewed in the context of its overarching trend (see charts, page 2).
The problem may be that many investors are looking in the wrong places. Taking a step back to glance at the bigger picture reveals that there never really was much of a Trump rally. Nearly all TAA-relevant trends are fundamentally justifiable and long predated the US election across all regions and asset classes. As we highlighted in a recent LGT Beacon (see here), the rally began when Japan and China significantly relaxed their monetary stance in early 2016. So, President Trump may not have delivered much on campaign promises thus so far - but he does not really need to at this stage, and he has certainly not ended the preexisting trends either.
Finally, the following point is also important: our TAA is defined against our own proprietary strategic allocation (SAA), i.e. the long-term positioning of the Princely Strategy managed by LGT Capital Partners. Designed to perform well over a cycle of several years, our SAA already takes into account a whole range of likely and possible global macro scenarios (see page 2, here). Furthermore, we remedy the omnipresent and difficult to actively time risk of temporary or even longer-lasting volatility outbreaks by assigning a high allocation to alternative assets. This special scenario approach helps to increase our tactical confidence, allowing us to respond in a structured and calm manner even to unexpected market-external events, without losing sight of the underlying macro trends.
Note: The next edition of the LGT Beacon is scheduled for 10 May 2017.