“There is a lot of uncertainty around what might happen if president Trump will take charge as opposed to the rhetoric of president-elect Trump,” Hawker said. “That could obviously have some quite far-reaching consequences.”
Linked to Trump’s policies is what Mercer cited in its 2017 global outlook as the biggest worry: A risk scenario that is “higher than it has been for some time” in which the US Federal Reserve raises rates aggressively as inflation picks up.
“In 2017 it is likely inflation will rise and unemployment will fall, forcing the Fed to move more aggressively,” the firm said.
Political risks “seem elevated”, according to Mercer. In particular, the firm cites the possibility of the US starting a trade war and upcoming European elections that could bring populist politicians into power.
China, Hawker added, which is heavily dependent on exports for economic growth, could be the biggest loser if the US were to raise protectionist barriers. A lot of questions over how the Trump presidency could impact not only China but Asia as a whole remain unanswered.
“It is hard to know the exact outcome and there are a lot of factors that one needs to think about,” Hawker said. “China is slowing down – it is probably a managed slowdown, but if that were to surprise on the downside that could have some implications in Asia.”
Hawker is also watching Europe, where the Netherlands, France and Germany, all three countries that have seen a rise in anti-establishment parties, will go to the polls this year. If anti-establishment parties gain power in Europe, especially after the UK voted to leave the European Union last year, it could be a “shock to the stability of the Eurozone” and unsettle markets, he said.
`Less worse’
Those concerns are increasingly felt in Asia. Hawker, who is based in Singapore, said he was talking to clients who have portfolios with short-term sensitivity to markets about hedging those risks using derivatives or shifting to assets that might perform “less worse”.
“There are lower returns, basically across the board, in fixed income and equity markets, but there are opportunities for investors who can give up some liquidity to get returns in the private markets,” he said. “But there is a lot of capital chasing those returns.”
Given the new reality, Hawker said investors needed to become more realistic about the kind of returns they could get in the coming years and to review the fees they were paying for those returns.
Mercer did have a positive note in its 2017 outlook: Reflation could end deflationary fears.
“This could boost overall confidence, prompting a pickup in global capital investment, and reduce real debt levels”, the firm said, adding that increased global investment and the spread of new technologies could boost what has been “very poor” global productivity.
