Viewing volatility as your friend and not foe

I CANNOT remember going into a year where there has not been any uncertainty. If I had told you that on Jan 1, 2016, that the following January would be one of the worst starts to a year in equities, oil would break US$30, June would bring Brexit, and November a Trump election as US President, would that information have helped you make money? Doubtful! I am sure many would have been heavily overweighed on cash and missed solid returns which were positive across most asset classes.

Last year, for example, we became positive on oil in January and raised our equity weightings in February after the sell-off as we reaffirmed our forecast for moderate growth. Furthermore, the market had already discounted a far worse outcome. Another major decision, after Brexit, the market did not price a Federal Reserve rate rise in 2016 and 2017, and many were convinced we were stuck in a world of negative rates. We believed it was a UK issue, not a broader European one at this point, and held our view of a Federal Reserve rate rise in December. These were not easy decisions. It is always important to see what cards you're dealt. Do you fold, call or raise? In short, it is all about risk and reward.

While there are notable risks as we enter 2017, we must view volatility as your friend rather than solely your foe. "Easier said than done right," you might be saying? I agree! So the key is having a view. We expect another year of moderate global growth but more importantly, with rising inflation. That's the blueprint that I will go back to when market volatility rises this year. If these trends have not changed, then one could take advantage of the volatility. What could be the key moments this year? Better than expected fiscal policy in the US, which is already at full employment coupled with the Federal Reserve hesitating to raise rates, leading to an overshoot in inflation and interest rates? Another key moment is political tension developing in Europe or finally a trade war. Nevertheless, our investment themes for 2017 highlight these tensions and how clients can position their portfolios for the possible volatility ahead.