I attended the Portfolio Construction Summit on Tuesday this week. As usual, the line-up of presenters and speakers was extraordinary and always enlightening.
I offer a brief summary of some of the take-outs from the day:
The overall consensus view (taking a long-term 3 to 5 year approach) was positive for equity markets. However, short term volatility is expected. One view was that inflation and wage growth will pick up far more than expected and could cause a sharp fall in equity markets in the short term. This view, however, was not shared among the speaker panel.
One view is that wage growth and consumer confidence will result in more spending and hence an increase in GDP, which is generally a positive for equity markets. The US middle class is also improving and this earnings growth could drive price to earnings(P/E) expansion resulting in an increase again in equity markets.
However, what can go wrong?
US markets could become quite complacent — and we saw the recent bouts of market corrections in the past 2 weeks.
Interest rates (10 year) could increase faster than expected, causing price to earnings revaluations (downwards), causing equity markets to fall.
Protectionism in the US, especially under Trump, could trigger a trade war with China and disrupt business confidence and create political unrest.
And lastly, Geopolitics such as the outbreak of conflict with North Korea, unrest in the Middle East, etc. could cause issues.
Diversification is key to withstanding market volatility over coming years. It is important to focus on logic and long-term goals and asset allocation. Strip away the “noise” that markets/media generates and focus on investing in human endeavour through quality investments. That has always prevailed through “thick and thin” and withstood the trials of equity markets over time.