Identifying opportunities in an unpredictable world

Speaking to the United Nations General Assembly in January, UN Secretary-General António Guterres described the world as ‘brimming’ with unpredictability.

For investors, this has meant navigating periods of volatility, as markets wrestle with the likely economic fallout of conflict and increased geopolitical tensions, while simultaneously assessing the impact of a rapid growth in the use of artificial intelligence (AI).

As portfolio managers, we are keenly aware that this volatility can frequently present long-term opportunities. However, seizing these opportunities and seeking to manage emerging risks to portfolios can require agility.

In such an environment, it should be no surprise that international advisers are increasingly appreciating the limitations of using MPS portfolios or constructing their own portfolios. They are recognising the benefits of multi-asset fund structures, which enable investment teams to act far more nimbly and efficiently, providing significant potential benefits in an increasingly fast-paced market environment.

We have been seeking to use this greater agility to maximum effect in our international portfolios, seizing on what we believe are a number of attractive long-term opportunities.

Global smaller companies

Over recent months we have been increasing exposure to global smaller companies. We started this before the Middle East conflict escalated and we believe that if sentiment changes towards these companies, which are deeply discounted relative to their larger counterparts, then we could see flows into this asset class.

We have added to Japanese equities, which are forecast to achieve strong earnings growth, while also benefiting from corporate governance reforms and economic stimulus from a growth-focused government. Similarly, we see an attractive opportunity in Asia-Pacific equities, which offer a combination of attractive valuations, supportive structural trends and earnings growth momentum.

We have also increased our allocation to emerging markets, which have enjoyed a strong run, but which we believe still offer appealing prospects.

While the US remains our largest equity allocation by a significant margin, we have reduced exposure because we see opportunities elsewhere. We have also trimmed our exposure to European equities after a strong run.

Government bonds

In fixed interest, we have steadily increased our exposure to government bonds, which we believe offer an attractive risk-reward profile. We have reduced our corporate bond holdings, taking the view that they look less appealing in the current economic environment.

We have sold out of industrial metals, which performed well in the relatively short period we held them, and reopened a small position in gold.

Artificial intelligence

We are watching closely how the stock market listing plays out for SpaceX, which has plans for huge expansion in the AI arena, and will also be carefully observing the planned IPOs by Anthropic and OpenAI. Optimism about AI has helped to propel markets higher, despite conflict in Ukraine and the Middle East, and heightened geopolitical tensions elsewhere.

Seeing the level of support for the listings by these AI giants will provide an important gauge of investors’ confidence about the extent to which the huge levels of investment in this new technology can be translated into profits.

We will also continue to closely monitor tanker traffic in the Strait of Hormuz. While the rhetoric from Washington and Tehran continues to make headlines, for investors the essential question is whether oil and gas supplies are on the move again – and exactly how many tankers are entering and leaving the Persian Gulf.

US midterms

This will also be a key concern for Donald Trump, particularly with the US midterm elections looming in November. Higher oil prices and the knock-on effect at the petrol pump have been keenly felt by US voters. In a recent NPR/PBS News/Marist poll, more than 60% of respondents blamed Trump for higher fuel costs.

All 435 seats in the House of Representatives and a third of seats in the Senate will be up for grabs in the midterms. The Republicans are defending slim majorities in both the House and the Senate. If the Democrats win control of either chamber, they could limit Trump's legislative agenda and press ahead with investigations of both the president and his administration.

Forecasting by the Economist gives the Democrats a 90% chance of winning control of the House and predicts the outcome in the Senate will be “a toss-up”.

Trump will be only too aware of the polls showing his popularity at an all-time low, and of the challenge facing the Republican party. We will be watching closely to understand the substance of how he responds to this, and assessing the likely impact of any policies announced will be a key focus for us in the months ahead.

In an unpredictable market environment, we believe agile multi-asset portfolios have an important role to play, helping to navigate volatility, while remaining positioned to seize on opportunities. In our view, diversification remains key, along with the flexibility to respond dynamically to opportunities and risks, and the discipline to maintain a clear focus on long-term outcomes.

Nathan Sweeney is Chief Investment Officer of Multi-Asset at Marlborough