June 23, 2016

Success During Times of Uncertainty

by Carmen in News

We are entering a new age in human history where risk is increasingly imminent, holds a wider range of consequences and has the capacity to last for generations. Unsolved crises worldwide have catalyzed a massive era of migration, boosted the frequency and severity of terrorist attacks and maintained artificial support and complacency in our global financial markets. The resulting tension between countries and governments as they search for solutions are now having a greater impact on our lives, businesses and investment opportunities.

Global financial markets are currently bracing themselves as the United Kingdom hold a referendum to determine their membership to the European Union. Investors, economists and analysts around the world are concerned that the vote will have considerable impact on the world’s financial markets, especially within stocks, bonds and currencies. A British exit from the EU strengthens the argument that current political and monetary policies are weakening, restricting the international flows of trade and finance while catalyzing more protectionist and insular governments. This is already occurring on a global scale. Since 2009, G20 countries have imposed 1,583 trade restrictive measures. Between October 2015 and May 2016 G20 economies implemented 145 more (reaching the highest monthly average since records began at the World Trade Organization).

 Source: Bloomberg Finance LP & Deutsche Bank Research (2016)

Uncertainty for the future can be easily felt across global financial markets. In the weeks preceding the UK’s EU referendum, the FTSE 100 lost £100 billion. Stocks fell by 3.5% in Japan, 2.5% in Hong Kong, 2% in Europe and 0.7% in the United States. According to the Wall Street Journal, a 5-10% drop in global stock markets will be expected if the UK votes to leave the EU. That leaves $6.9 trillion of stock market capitalization in the balance, not to mention losses for the British Pound and the Euro.

 Source: Bloomberg Finance LP & Deutsche Bank Research (2016)

The long-term consequences of a ‘Brexit’ are much more difficult to anticipate.

It is interesting to note that as the campaign for the UK to remain in the EU regained momentum over the last few days the MSCI Emerging Market Index increased by 1.9%. This was led by Brazil’s 2.3% jump in the Bovespa, followed by Bourses in Poland (1.7%), South Africa (1.5%), Mexico (1.3%) and Russia (1%). The increasing confidence in the markets, spurred by the prospect of a ‘remain’ result at the referendum, has driven investors away from safe haven assets such as high-grade sovereign bonds in their search for higher returns.

Meanwhile, the United States is holding a historic Presidential Election mired by controversy, China continues its hard landing, Russia suffers from international sanctions stemming from conflict in the Ukraine and Brazil is implementing a series of fiscal reforms through their Interim Government. The World Economic Forum has demonstrated concern for our changing geopolitical landscape and warns of another economic slowdown with knock-on effects on employment and social stability.

Out of this uncertainty populations around the world are expressing fundamental demands, both as citizens and consumers. Their expectations continue to positively reform governance and corporate systems, driving momentum to adopt new practices throughout policy and industry. As governments struggle with social and financial pressures, innovative models of collaborative development have been put in place to solve some of the world’s most significant challenges. Such progress will rely on the continued investment in projects and services critical to the survival of mankind such as securing our food supply and protecting our environment. Private investment in a sustainable future is an effective way for investors to diversify their portfolio and mitigate risk while making social, financial and long-term returns. Sustainable, responsible and impact investing is gaining significant momentum, enjoying a growth rate of more than 76% over the last few years from $3.74 trillion to $6.57 trillion.

The increasing complexity, ambiguity and volatility of our financial and geopolitical surroundings ultimately heighten the severity of risk. We find ourselves in need of a clear strategy that calls for innovation, adaptation and resilience in the face of adversity. Investors must turn towards fundamental assets that sustain life in order to safely face this increasing environment of uncertainty across global markets. Focusing on the essential needs of mankind, we choose socially responsible and sustainable asset classes for survival and financial prosperity across generations.