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Mercer: Baked-in optimism warrants portfolio review

Equity markets are priced for positive scenarios and investors should now review portfolios with an eye on currency denomination and cash holdings, said Garry Hawker, partner and director of strategic research for growth markets.

“We have a situation with about eight years of central banks controlling what is happening in the markets and controlling liquidity,” Hawker told FSA. “Some of that is starting to unwind or run its course and we recommend reviewing currency.

“Currency is not an issue now but we’re working through the fact that funds have been accumulating assets and are now starting to experience outflows, so that makes currency questions much more relevant. If US dollar strength changes, what does it mean to the portfolio?

“Currency risk is always around but not always obvious to many investors.”

Hawker, who works with institutional and private bank clients and also has strategic research function, described risks for 2017 that seem to have become part of the risk consensus.

Among them: the follow through on the US president’s policy promises; US protectionist policies that could impact global trade; elections in Europe that could give populist candidates victories or greater influence.

“With all these risks, the world starts to look more fragile and the equity market is very focused on the optimistic view of things.”

Wary of equities

The firm is recommending an underweight in US markets.

“A US market crash is not a central scenario but it is one of our risk scenarios. Equity markets are priced for good news. Even a marginal outcome from elections could be a trigger [for a crash].”

However, with volatility low, investors can put hedges on the equity side, he said.

“We are also suggesting holding more cash [than usual] rather than just investing for the sake of investing without getting the risk/return you want.”

He said most clients probably don’t have any strategic allocation to cash. “Cash [allocation] is more of a default aspect if investors don’t like bonds or equities.”

Hawker said he is neutral on investment returns for both bonds and equities in 2017.

“For equities, the best guess is ok returns but nothing spectacular. People are chasing return and therefore valuations have gone up, so it is hard to be optimistic.”

Part of the Mark Allen Group.