Knowledge. Shared Blog
December 2019
Roundtable Discussion: Navigating Low Rates and Political Upheaval
Jason England
Portfolio ManagerDaniel Siluk
Portfolio ManagerNick Maroutsos
Co-Head of Global Bonds | Portfolio Manager
In this round-table discussion, Portfolio Managers Nick Maroutsos, Dan Siluk and Jason England talk candidly about how geopolitics and the low rate environment are influencing the market.
Key Takeaways
- U.S.-China trade tensions and the overhang of Brexit have created uncertainty in the markets and led to a slowdown in Europe and throughout Asia.
- As geopolitics continue to drive market expectations, we believe it’s important to avoid being overly reactive to headlines and maintain a longer-term view.
- When it comes to the issue of negative rates, we think it is best to focus on positively real yielding jurisdictions such as the U.S. and Asia ex-Japan, as well as Australia and New Zealand, where we feel there are still opportunities to help generate positive returns.
View Transcript
Dan Siluk: I guess the last few years have been characterized by some pretty significant political upheaval or political volatility around the globe. When we go back to 2016, it was the Brexit vote; a few months later, Trump was elected despite the polls, bookies, markets all predicting a Clinton win. And then more recently, we’ve seen the trade rhetoric between the U.S. and China really escalate and that has led to uncertainty in markets, it’s led to a slowdown in Europe, it’s led to a slowdown through Asia. Is there an end to all of this? I mean, do we become political analysts rather than the traditional financial analysts, economists that we’ve grown up being?
Nick Maroutsos: I think the political side of things has really become a focal point. And I think we have to take more of a longer-term approach when looking at markets. But, when focusing more on the political side, it certainly is important. So you have, like you said, the overhang of Brexit, which has reverberated through the markets time in and time out, adding undue volatility. Then you have, probably more topically, the trade tensions, which is really wreaking havoc across, let’s say, China and the U.S. and spilling over into the rest of the globe. So, I think in addition to central bank expectations, the political side of things is also driving market expectations because we’re sort of at the whim of a tweet from a president or any sort of expectation that there may be a resolution to trade deals or less progress being made. And that ultimately affects markets and our positions.
Jason England: Yes, unfortunately, I just think that’s the world we live in today. I think the hard part about it is, you know, take Brexit for example. They just keep kicking the can down the road and you can never escape. Every time you think you’re reaching some kind of conclusion all of a sudden, it changes, or the date changes and it gets moved down the road. And I think we are seeing that with the trade talks as well. All of a sudden, they’re going to come to some kind of agreement and then the markets rally off that. And then all of a sudden, no, it’s not, and then the markets go in the other direction. So I think the key thing from a risk management standpoint, when you’re looking at the political side of things is, you can’t be knee-jerk, where you’re going to move your portfolio here and there because of this, but you also want to make sure that you do put proper hedging in place when you want to ride out this volatility. And I think that’s the key thing, that yes, we don’t want to be political experts, but we do have to be cognizant of what is out there and what is going to affect it and what kind of shock that could have.
Maroutsos: How do we reconcile the fact that we’re facing an investment universe that is littered with negative interest rates?
Siluk: Look, I think the negatively yielding asset base in Europe is really not a source of return in this environment. I think we need to look at positively real yielding jurisdictions such as the U.S., such as places like Asia ex-Japan, such as Australia and New Zealand. And I think there are certainly some opportunities there. And one other factor is credit. I mean, despite there being inverted yield curves around the world and all this talk about whether it’s the 3-month/10-year or the 2-year/10-year being inverted, being a predictor of recession, the important thing to note is that the credit yield curve remains positively sloped.
The 3-month/10-year and 2-year/10-year refers to the yield difference between the 3-month U.S. Treasury and 10-year U.S. Treasury and the 2-year U.S. Treasury and 10-year U.S. Treasury
The Yield Curve shows the yield of bonds with varying maturities, from short to long. Generally, longer bonds have higher yields. The curve inverts when shorter-term bonds have higher yields.
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