Political risk has certainly risen in Europe, but the same sentiment that prompted the Brexit vote can be felt across much of the world. The policies being followed by established political parties have led to feelings of greater inequality in a number of countries. A large section of the populace feels disenfranchised and is desperately seeking change.

This feeling has fueled the rise of populist politicians such as Donald Trump, the Republican candidate for the US presidency, and Marine Le Pen, leader of France’s National Front, who are promoting attractive narratives for a more prosperous future. These politicians typically support trade barriers as a bulwark against foreign competition; and portray immigration as a key problem.

This anti-globalisation agenda has huge implications for financial markets. Immigration has boosted corporate earnings in many countries by providing an ample supply of labour. The advance of free trade has accelerated global economic growth, which is good for stocks too. We can expect volatility in stocks and many other asset classes with every advance and setback to the electoral prospects of populist politicians, and with every policy prescription they devise if they gain power. This raises the risks for equity markets and potentially reduces prospective returns.

At the same time the prospective returns from government bonds are extremely low. Brexit has pushed down yields on 10-year gilts to record lows under 1%. This is largely because of the easing policy stance from the Bank of England given that the post-Brexit mood of uncertainty is likely to hit economic growth.

But the implications of Brexit spread far beyond the UK markets. Janet Yellen, Chair of the Federal Reserve, warned before the referendum result that Brexit could “negatively affect financial conditions and the US economic outlook” – keeping Treasury yields down. More generally, if populism reduces global growth, bond yields across the world will remain lower for longer. This is evidenced by Germany joining Japan in having negative bond yields. These low government bond yields also drag down the prospective returns from investment grade corporate bonds as well.

So, if the risk-return trade-off from equities has deteriorated and government bonds offer very low returns then where do investors go for consistent growth?

One answer is diversification.

There is an increasing array of investment opportunities away from traditional asset classes

There is an increasing array of investment opportunities away from traditional asset classes that offer the potential for attractive returns but with different return drivers. This approach is perfect for a turbulent era because it has an impressive record of producing good returns but with lower volatility than other strategies – improving the risk-reward outlook once more.

These diversifying asset classes include infrastructure, offering relatively stable long-run cashflows with little economic exposure. It also includes various forms of higher returning credit opportunities including high-yield bonds, asset-backed securities, loans and peer-to-peer lending, subject to careful due diligence. Emerging market bonds have also regained favour this year as a prolonged lower interest rate environment favours emerging economies.

First « 1 2 » Next