Asked to name songs which best define today’s political situation, speakers at the FT’s recent Wealth Management Summit voted for Bob Dylan’s ‘The times they are a changin’’. Recorded more than half a century ago, the track features a heartfelt plea to US lawmakers:
“Come senators, congressmen,
Please heed the call,
Don’t stand in the doorway,
Don’t block up the hall.”
These words hold huge resonance today, with US incumbent president Donald Trump contesting the newly-elected administration’s right to enter the White House.
His role in hijacking the Republican machine to intensify political polarisation is likely to weaken the governance of the US for many years to come, according to Amin Rajan, founder of the Create-Research consultancy, who spoke at the summit.
The wrecking balls thrown at peace and prosperity-building post-war institutions – including the WHO, the EU and NATO – compound Mr Trump’s lack of attention to world-threatening challenges of climate change, ageing populations, technological unemployment and social inequalities.
President-elect Joe Biden, believes Mr Rajan, can only scratch the surface of America’s deep political afflictions and may struggle to build a new post-pandemic world order, given the current divisions in US society.
Major challenges for the incomer include smoothing out the stop-and-go nature of the US economy, as well as repairing damaged political machinery. While economic volatility is likely to remain until mass vaccinations take effect, there are rival visions about how this will shape market fortunes. One offers some trends and certainty, the other less so.
Differing views
Optimists such as Didier Duret, investment committee member at Omega Wealth Management, describe a US “crab-walking” towards post-pandemic normality, triggering high-frequency rotation between Covid-friendly growth and cyclical stocks, maintaining “positive dynamics towards equity investing”.
A more pessimistic scenario from James Bevan, head of investments at CCLA, predicts US and European fiscal measures to boost browbeaten economies, heralding an inexorable move towards big government and big deficits, relying on state-sponsored banks to finance mounting debt. Such a move towards a north Asian model could leave volatile, liquidity-fuelled but essentially trendless markets playing a more limited role.
These contrasting narratives are based on different geopolitical assumptions. Optimists assume the realpolitik of governing in the epidemic era will weaken western appetites for extreme politics. Covid’s catalytic acceleration of a shift to a more multi-polar world could lead to a new epoch of stronger regional powers, rather than the old system of global hegemons seeking world dominance. Robust regional recoveries would frame a constructive equity story.
The less bullish camp, associated with Mr Bevan, expect the US to carry on dominating the global order, despite long-running projections of a changing of the guard, with both Europe and China candidates for the lead role. “The US has ample resources, an entrepreneurial culture, a central bank and government system that can support positive capitalism and sustainability, and the dollar remains reserve currency,” he asserts.
A consequent US/China struggle for supremacy may well dominate a decade of policy uncertainty, as the West seeks a new economic model. Mr Bevan warns: “We may well be approaching an era-defining period for global economics and politics and such periods of change are usually accompanied by high levels of asset price and currency volatility.”
Common ground
But the two camps agree on several priorities. Both heed the battle cry for diversification. Increased exposure to Asia and Europe can make much sense at a time when there are so many sources of volatility. Classical rotation discipline – moving out of successful stocks into those looking cheap – will have more of a place than ever.
The question is whether a parallel rotation away from the populist politics propagated by Mr Trump and his followers across many countries will lead to an era of greater stability or will fail to satisfy electorates craving economic improvement.
Changing trading patterns and alliances may determine the answer. A variety of potential permutations will involve key actors of the US, China, the EU, the WTO and peripheral players such as the post-Brexit UK. A decade of globalisation negated previously potent diversification, propagated by ‘modern’ portfolio theory of the 1950s. During the global financial crisis of 2008, most markets moved in parallel.
As a result, private banks responded with concentrated investment calls. Yet today, these actors are once again highlighting effective asset allocation. As we enter a new era of reduced market interconnectivity, increased economic nationalism and stronger regional dynamics, diversification may once more define portfolio management. This means selected listed equity positions in a variety of markets, less reliance on fixed income and moves into alternative assets.
The private bank of the future must also become more adept at spotting, analysing and monetising megatrends, believes Create’s Mr Rajan. Emergence of secular investment themes – like technology, healthcare and climate change – transcend market cycles as they centre on selective growth points in the global economy, he says.
But this approach must be combined with more advanced risk management, moving from backward-looking risk models based on past price behaviours to forward-looking scenario planning.
This will require structural changes in wealth management, involving establishment of cross-disciplinary teams, better able to spot underlying vulnerabilities and respond in a timely fashion. A debating culture will also help generate new ideas and shift opinions to match new evidence.
The protests going on in our streets, demanding equality, diversity and social progress, can help shape and influence the debate. But the necessary transformation of society, government and business will likely be decided in backroom discussions between business and political leaders.
As Gil Scott-Heron, the musician, author and poet, predicted in his portentous 1970s lyric, describing the interaction between brands, politicians and media channels: “The revolution will not be televised.”
