deVere Group - International Investment Strategy

International Investment Strategy

deVere Investment Strategy aims to provide clients with a comprehensive picture of the global economy and regular updates on current stock market and fixed income trends, in order to assist investors in making informed investment decisions. It is headed by Tom Elliott, deVere's International Investment Strategist, who produces regular videos and blogs on a wide range of topical investment issues, and regularly speaks at seminars for clients at deVere offices around the world.

The core-satellite approach to investing has several advantages over buying a multitude of separate, high risk investments. The bulk of the portfolio is handed over to a professional multi asset investor, who is qualified to match expected returns with expected levels of risk. The satellite investments allow the client to try to 'beat' the market with higher risk investments, but total portfolio risk is reduced through setting a limit on the size of the satellite allocation relative to the core.

Note: The information contained in this chart is for general guidance on matters of interest only. The deVere Group disclaims any responsibility for content errors, omissions, or infringing material and disclaims any responsibility associated with relying on the information provided herein.

Tom Elliott

International Investment Strategist

Tom Elliott is the deVere Group's International Strategist. His role is to help the Group's clients to better understand the economic and political influences that drive capital markets, which in turn drive investor returns.

Tom, formerly an Executive Director at JP Morgan Asset Management, has 25 years experience in the financial sector.

He is currently a visiting lecturer in the department of political economy at King’s College, London.

Twitter
Tom Elliott
Recent Broadcasts
Video
June 19, 2019

Modern Monetary Theory - investors beware!
Tom Elliott

Older posts

Trump, Iran and the US-China trade talks: Is it just noise?
May 14, 2019

Global stock markets: a strong start to the second quarter
Tom Elliott, investment strategist at the deVere Group, believes that stronger than expected GDP growth in China, a likely trade deal between the U.S and China, and the prospect of solid economic growth in the U.S persisting for some time to come, all help support global stock markets and other risk assets
April 18, 2019

Fears of U.S. economic recession are overdone
Investors are concerned that the inverted U.S yield curve signals an upcoming recession. But the Fed has shown itself to be adaptive and has room to cut rates and so support economic activity and stock market valuations.
April 01, 2019

The beginning of market tranquillity?
March 20, 2019

Fed easing of monetary policy, optimism on U.S/ China trade, while a soft Brexit approaches
February 26, 2019

Video Archive >>

Blog
June 13, 2019

Investment Outlook
Tom Elliott

Market sentiment: Jumpy. The stock market recovery rally of early June has petered out, as investors return to worrying over the implications of Trump’s trade wars. Government bonds of the major developed countries (the ‘core’) are in demand. The interest rate futures market is pricing in a 98% chance of a Fed interest rate cut this year after weak May jobs data last week and the Markit purchasing managers index (PMI) fell to its lowest level since 2009. The spread between the yields on three months and the 10 year Treasury is now negative, at -0.12; for some analysts, this signifies a recession in the U.S in the next 18 months or so. Some analysts expect a Fed rate cut as soon as July if there is no U.S/ China rapprochement at the late June G20 summit. 

Core government bonds have thrived on expectations of weaker growth, demonstrating the utility of having fixed income in a multi-asset portfolio. The U.S 10 year Treasury yield has shrunk from 2.95% at the end of April to 2.11% yesterday. In Germany, 10-year bond yields sold at auction went for a record low yield of -0.24%. This suggests that whoever takes over from Mario Draghi, as head of the ECB, will inherit unfinished business: namely convincing investors that the eurozone is not heading into a Japan-like environment, of structurally low growth, inflation, and permanently negative real interest rates. 

Why do Trump’s trade disputes matter so much? Tariffs deter international trade. Trade has been a major driver of global economic growth over the last 60 years, as countries exploit what classical economists (ie, Adam Smith, David Ricardo) refer to as their ‘comparative advantage’ with one another. This says that both parties benefit equally from trade, so long as markets - including the flow of finance- are free of interference. This idea underpins the World Trade Organisation (WTO), which polices global trade and is constantly driving for lower trade tariffs, import quotas and other barriers to trade. Trump’s economics is more mercantile, meaning he believes trade to be a zero-sum game at which one party wins more than the other, and that the state should help direct trade with the objective of managing it to 1) run trade surpluses, 2) influence political events abroad. He has no love of the WTO.

The Chinese leadership, for all its claims to be a defender of free trade and globalisation, believes much the same Mercantilist philosophy. And indeed, Germany and Japan have been criticised for most of the post-war period for fetishizing trade surpluses. This ideology causes friction: all countries cannot, by definition, be running surpluses. If those who run deficits believe that they are ‘losing’ in international trade, as Trump does, they will react by seeking to change the rules of the game.

The move by the U.S away from free trade matters, in particular, because it is the world’s largest economy and importer. This gives the U.S considerable scope for bullying its trade partners, with further leverage coming from the use of the dollar as a currency of choice in global trade, and as a global reserve currency held by central banks. Furthermore, having been a key cheerleader for free market trade in the post-war years, its about-face weakens the ability of other free-trade orientated countries to hold the line against mercantilist supporters in their own countries (often to be found in the new brand of populist politicians).

It is not tariffs per se that worry economists and investors. Small tariffs on imports of 5% are easily absorbed by most industries. But 25% tariffs can destroy profit margins if they cannot be passed onto the final consumer, and if they can then there is by definition less available spending on other goods and services in the economy. There is also a fear that tariffs are being used by the White House outside of trade issues. Last week’s threat of tariffs against Mexico, over the migration issue, has shown how Trump is willing to mix trade with other issues. Many believe that his complaint against China’s trade practices is as much based on geopolitical rivalry as it is on genuine trade issues. This means tariffs look set to be imposed, and lifted, in an almost random manner that will deter international investment and trade flows, and global growth.

Turning Japanese? The recent sharp fall in core government bond yields around the world reflects investors’ near-term preference for defensive assets, as Trump adds countries, companies, and individuals to his list of foes. But it also reflects investors’ lack of belief in the ability of central bankers to successfully ‘normalise’ monetary policy. In other words, to bring interest rates, bond yields, and inflation back to pre-2008 financial crisis levels. 

With mediocre global GDP growth at present and relatively weak inflation in the major economies, it is difficult to see where the drivers for higher interest rates and bond yields will come from. Trade tariffs add to deflationary pressures, as do demographics-  since baby boomers in the west seek fixed income investments for their pensions, and Asian savers recycle trade surpluses into core government bond markets. The ultra-low interest rates that have existed in Japan for 20 years are becoming more normal in the west with every passing day. 

This has implications for investors. The much-anticipated crash of the bond market looks like being further delayed. We may have to wait for China to run large current account deficits (ie, absorb global capital), and the heirs of today’s retirees in the developed countries to spend their inheritance before pre-2008 monetary conditions return and yield curves steepen. Value stocks with high and secure dividend pay-outs may outperform growth-orientated stocks, and those with weak balance sheets that look to inflation to reduce the real value of their debts.

Is the economy safe in Conservative hands? Many of the candidates in the current Conservative party leadership contest appear to relish the prospect of a no deal Brexit, even as they claim the idea to be a last option. This is despite warnings from virtually all economists that a no deal could be chaotic for the U.K economy, and trigger a recession. Many of the candidates are also offering tax cuts should they be chosen by the party membership, greedily eying the Treasury’s £26 billion no deal ‘war chest’ as a source of possible funding for their largess. This has been carved out of the public finances by Chancellor Philip Hammond in order to boost public spending, and so support the economy, in the event of a no deal Brexit. 

Sterling, always nervous of talk of a hard Brexit coming from a no deal, has weakened in response. Some commentators wonder if the Conservative party is about to destroy its historically most potent claim over the Labour party: that the economy is safe in its hands. Although the hurdle may be quite low, given the Marxist sympathies of the opposition Labour party leadership.

A no deal Brexit on 31st October will see further falls in sterling. However, a second referendum, a general election, or even a revolt by Remain-supporting Conservative M.Ps against the new prime minister in a vote of no confidence, may yet scupper this least-desirable Brexit outcome. If so, a sharp rally in sterling and U.K risk assets, in general, can be expected, as a wave of pent up spending creates a mini economic boom. Once again the Bank of England will talk of raising interest rates (but note: under governor Mark Carney, the Bank of England has developed a reputation of more talk than action).

A multi-asset portfolio for the long term. Many long term investors favour investing in a combination of global equities and bonds since the two asset classes have a relatively low correlation with each other and so offer diversification benefits. Below is an illustration of a typical 60% equities/ 40% bonds fund. The exact ratio of equities and bonds will reflect a client’s risk profile and investment horizon.


 

Older posts

Investment Outlook
May 27, 2019

Investment Outlook
May 03, 2019

Investment Outlook
April 18, 2019

Investment Outlook
April 01, 2019

Investment Outlook
March 20, 2019

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