David Shairp, Head of Research, PPMG, gives his monthly update and discusses US trade tariffs, where challenges in the first quarter have left valuations and if recent events have affected the long-term positioning of portfolios.
PRESENTER: For a monthly look at the global economy, I’m joined down the line by David Sharp, Head of Research for Prudential Portfolio Management Group. Well, David, last month we spoke about President Trump’s trade tariffs. What was the response from China? Was it as expected?
DAVID SHARP: Hi Jenny. Yes I think it was broadly. I mean it was fairly clear that what the US was going to do the Chinese were going to respond, if not in kind then pretty close to it. At this stage it is very much a battle of words rather than a battle of actions. The US has put targeted a given amount of Chinese exports, about 1300 items, the Chinese have targeted a smaller number, closer to 100, but the same monetary amount with similar sort of tariffs. I think from a market perspective all we need to know at this stage is that this is being threatened rather than imposed but certainly I think it raises the question of tit for tat. But at least we’re not, we’re at the brink rather than over it at this stage.
PRESENTER: Now given that the first quarter was quite challenging, where’s that left valuations and have your tactical views changed?
DAVID SHARP: Well I think the risks are still very much out there. A trade war is something that people worry about but I think more recently I think there is an awareness that markets are beginning to see through that or beyond that. In terms of some of the themes of the first quarter, I think there are two or three things that stand out. First of all, we are in to a period of higher volatility. That is to be expected at the current stage of central bank tightening. The second question really and I think the one that markets are trying to digest now is whether growth is starting to weaken a little bit. There’ve been one or two indicators suggesting that the economic data have surprised negatively, particularly in the UK, in Europe and Japan, although holding up in the emerging markets in the US. And that is starting to raise questions of whether the equity outperformance, this long era that we’ve enjoyed almost unbroken since 2009 may be drawing to a close.
So I think there’s a little bit more caution. I think there’s a bit more concern. I think people are looking at the ‘what can go wrong?’ which is very much symptomatic of where we are in the cycle and I think the trade concerns are very much a signpost of that.
PRESENTER: So finally have any of the recent events affected the long-term positioning of portfolios?
DAVID SHARP: Well our shorter-term positioning has become a little bit more cautious. We are running closer to a neutral position in terms of our equity versus bonds and credit weightings. We still have a US yield curve steepness so looking for longer rates to rise faster than 10-year rates in the US. So we are fairly cautiously, fairly neutrally positioned in our tactical asset allocation. However, our portfolios are a sizeable diversified array of exposures, and some of our longer-term positions remain firmly in place. We are well diversified and have positions in property and alternatives, including hedge funds and private equity, as well as infrastructure. And we’re confident that this well-diversified mix of investments taking a longer term will continue to do well.
PRESENTER: David, thank you.
DAVID SHARP: Thank you.
PRESENTER: And Prudential Portfolio Management Group will be back next month with their latest updates so do keep an eye out for that on asset.tv. And thanks for watching.