Even as equity markets like those of the United States have headed to records and fixed income yields have held low while gold bullion and crude oil prices struggle, required for the markets is parsing of politics, policy and delivery. Much is at stake. It includes more permutations of violence and terrorism globally, the slow dance of Britain out of the European Union, the evolution of Japan including the desire of its Emperor to bow out and that as reputedly in the past, voting convictions in the U.S. Presidential race could jell before Labor Day. We believe the undercurrent of fragility in global politics is underestimated in the markets.
Demonstrably, the central banks have been instrumental in capital markets. Their influence lately has been underscored in the British corporate fixed income market after the latest announcement of the Bank of England and the reaction of equities globally to the last FOMC Statement. Even as many now espouse ‘helicopter money’ as the next quantitative ease option, uncertain is the level of influence that can be retained. Collateral effect risks from government intervention in allocating investment have risen on capital markets that are already distended against the crucial role of savings. Meanwhile, the corporate reporting season once more has seen more focus on beating consensus than on the realities of strong revenue competition across most sectors. We see the rationale as being strong for favoring quality in capital market instruments but also for diversifying by including precious metals. In fixed income, we would constrain duration to the short to medium end. In equities, we see cyclical leverage as being more advantageous in industrial over consumer spaces; in growth in information technology over healthcare and for the financial services being critical.