The political noise is deafening these days and, whether it is Brexit or the US mid-term elections, expect it to get louder still, writes Anthony Rayner.
For Brexit, the Labour Party conference has just started (will the leadership be forced to adopt a motion for a second referendum?) and the Conservative Party conference is soon after that (will the EU provide some positive titbits for the prime minister to help stave off a leadership battle, in order to avoid a hard Brexiteer replacement?).
There is a chance of better visibility by mid-November but January is probably the concrete deadline for agreement to meet the March 2019 deadline, assuming a deal is reached. Don't forget too - any deal needs UK political assent, and this is just the exit. So, expect some volatility around these dates - especially for sterling.
For the US mid-terms in November, meanwhile, tensions are rising too - not least around the trade war with China and the Mueller investigation into the Trump 2016 presidential campaign.
All headline-grabbing stuff, then, with investors desperate for a clue as to the most likely outcome. This is compounded by the fact investor self-confidence in predicting political outcomes has fallen - though it probably needs to fall further still to reach more realistic levels. For most of this year, many investors have written off the chance of a significant trade war between the US and China but it seems they were wrong and, in the meantime, it has had a material impact on financial markets.
There are certain parts of the risk environment that are almost impossible to analyse, we believe, but there are also areas we can get our heads around, if we keep focus and look through the noise.
US economic growth is strong. The ISM manufacturing survey, which tends to have a pretty good relationship with GDP, recently reached a multi-year high, while most consumer confidence surveys are at, or close to, multi-year highs (the consumer is a big swing factor for the US economy). Despite this decent growth outlook, the fiscal stimulus for the US will be strong this year and next (as opposed to being used as counter cyclical policy that boosts a weaker economy).
Is the US overheating?
It therefore seems fair to ask whether or not the US economy is overheating? Well, surprisingly perhaps, inflation at a consumer price level is being very well-behaved but labour markets are tight and wages seem to be on a steady trend upwards - albeit not at threatening levels yet.
The Fed tends to put more of an emphasis on the dynamics in the labour market and so we expect rates to continue to rise gradually. More generally, across the major developed economies, wage growth is close to, or above, cyclical highs.
Indeed, most of the other major economies seem to be growing at a fair clip. Germany's key IFO business survey is close to multi-year highs, while concerns remain as to the degree of slowing in the Chinese economy, though policy measures are being introduced to try to address this.
All in all, our base case remains broadly unchanged this year - decent growth, with rates rising gently. That said, we underappreciated the degree to which tighter US liquidity and global trade tensions would hurt emerging markets. Fortunately, we were not invested in the likes of Turkey, Argentina and Russia but we have reduced our exposure to emerging market equity and bonds.
Key questions that remain unanswered as we move towards the fourth quarter are whether emerging market risk remains idiosyncratic or becomes systemic and the profile of wages growth.
In the meantime, in line with tighter US liquidity, the ‘survival of the fittest' continues to dominate what we do. In practice, this means we continue to pay attention to rate sensitivity. At an asset class level, for equities we have a preference for less indebted companies, in bonds we prefer short duration and good quality credit, and in currencies, where we have exposure to non-sterling assets, we have a bias to economies that have more sustainable external funding requirements.
Anthony Rayner is co-manager of Miton's multi-asset fund range
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